When seeking Inheritance Tax advice, you may or may not be aware that back on the 6th April 2017 a new additional allowance for Inheritance Tax (IHT) was launched.
Since 2009, the starting point for Inheritance Tax advice has been the main Inheritance Tax allowance (called the Nil Rate Band or NRB for short) which has been £325,000.
What this means is that on your death up to £325,000 of everything you own (your estate) can be inherited by someone else without the administrators of your estate having to pay IHT.
If the value of your estate on your death is worth more than £325,000 then your administrators could potentially have to pay 40% IHT on the excess.
Inheritance Tax advice for your family home
Now Inheritance Tax advice uses an additional new allowance called the Residence Nil Rate Band (RNRB) which is an allowance specifically for your family home.
The RNRB increases in size over the next few tax years as follows:
2017/18 = £100,000
2018/19 = £125,000
2019/20 = £150,000
2020/21 = £175,000
So let me explain what this all means by way of an example.
Chris and Mandy are married, have two children and own the following assets:
Family home = £750,000
Savings = £100,000
Investments = £300,000
Total net worth = £1,150,000
If Chris was to die first and leave everything to Mandy then there would be no IHT to pay on Chris’s death because gifts made to spouses are exempt from IHT. If everything is left to Mandy then Mandy also receives Chris’s NRB and RNRB as he hasn’t used them.
However if Mandy was to die in the current tax year 2018/19 leaving everything to the two children, the IHT position would be as follows:
Net worth = £1,150,000
Deduct 2 x NRB: £650,000
Deduct 2 x RNRB: £250,000
Leaving £250,000 subject to IHT at 40%, meaning an IHT bill of £100,000 payable before the children can receive their inheritance!
The Inheritance Tax advice of using the new RNRB has saved the children an extra £100,000 in IHT.
By 2020/21 a married couple with a £1 million estate could end up paying zero IHT.
But there is a catch. There are a number of rules to be aware of.
If you want to carry out your own IHT calculation here is a handy calculator.
The RNRB only applies under the following conditions:
You own a home. If you sold your house before 8th July 2015 to live with relatives or pay for residential care then you will not benefit.
You must leave your home to direct descendants e.g. children/grandchildren. If you don’t have children or leave the house to others you will not benefit.
The RNRB will reduce by £1 for every £2 your estate is over £2 million.
So typical of most government policies, the devil is in the detail and it can be complex.
With the right Inheritance Tax advice, paying IHT is optional
IHT is one of the most frustrating taxes to pay as you have paid taxes all your life and then face a big whammy of a tax on death.
The government receipts from IHT are increasing. Last year they raised £5.2 billion in IHT alone which was a new record.
The reason for this increase?
Mainly because of soaring property prices particularly in London and the South East.
You may think IHT is a problem for the super rich. Not any more, families with average size family homes who have been good with money throughout their life are now being caught.
But bear this in mind. IHT is basically an optional tax. Whilst legally you have to pay it if you owe it, with the right Inheritance Tax advice, you can choose to plan your finances in such a way that you never end up paying IHT.
Whilst the new RNRB goes some way to helping avoid IHT it is still complex and not enough in isolation.
The good news is that there are legitimate, simple Inheritance Tax Advice strategies that you can put in place to massively increase the size of your families inheritance by virtue of them not paying IHT. If you would like to find out more about these strategies please contact me and I’ll be happy to send you details.
Want to know more about IHT generally? Check out this guide.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.