Myth 2 – The residence nil rate band now heralds a £1m UK IHT allowance for all
Prior to the 2010 election, David Cameron announced an ambition to raise the inheritance tax threshold to £1m per person. More than seven years later, strictly speaking the IHT threshold is still £325,000 per person and £650,000 for a married couple.
Instead, on 6 April 2017, a significantly watered-down version of his promise was delivered in the form of the residence nil rate band (RNRB). This was made available for inherited residences (or financial wealth that represents properties once lived in), in addition to the existing IHT nil rate band (NRB) which was then and currently remains at £325,000.
How has the RNRB been phased in?
In 2017/2018 the RNRB started at £100,000. It has since been increasing by £25,000 each year and in 2019/2020 stands at £150,000. This will continue until 2020/21 when it will reach £175,000.
As with the NRB, any unused RNRB can be transferred to a surviving spouse or civil partner, with the effect that the maximum combined IHT threshold for such couples will be a total of £1m by 6 April 2020 – this is shown here.
An individual has:
£325,000 IHT allowance + £175,000 (RNRB) allowance = £500,000.
Then a couple has:
£500,000 x 2 = £1m allowance.
But three qualifying conditions apply
Not only has the new exemption been designed to deliver a maximum of £500,000 per person, or £1m per couple (rather than £1m per person), but a number of qualifying conditions also need to be satisfied.
Its application is complex but, in basic terms, the RNRB may apply where:
- there is an interest in a property which has been used as a residence by an individual and/or
- it is left on an individual’s death to, or for the benefit of, direct descendants only.
If these conditions are met, a third test then applies:
Is the estate over £2m?
This is important as the RNRB will be tapered away for estates over £2m. The taper is a £1 loss for every £2 in excess of £2m.
What does this mean for £2m+ estates?
As a result, estates over £2.2m during 2017/18 did not benefit from the RNRB at all. But when the relief reaches £175,000 in 2020/21 (after being phased in as explained above), the cut-off will rise to estates over £2.35m.
In light of this £2m taper threshold it’s important to keep the value of an estate under ongoing review. Remember that for this purpose, the value of the estate is calculated net of debts, but any reliefs or exemptions are not deducted.
One way to reduce the impact of tapering is to avoid ‘bunching’ of a couple’s estate on the second death, as this will mean that the taper threshold is exceeded. In cases like this, it’s best to consider leaving property on trust for the survivor (instead of directly to them).
Also, take care that a mortgage does not reduce the net value of a home below the amount of the available RNRB.
Speak to your AAM Wealth Manager or email [email protected] for help navigating this complex area.
In our last edition we covered Myth 1 “My partner will inherit everything free of UK inheritance tax… won’t they?”
Don’t forget to look out for the final part in this series in January’s edition, – “Myth 3 – My property is my pension – and they’re taxed the same?”
This article is for information purposes only. The views expressed in this document are those of our sister company, Old Mutual International and are subject to change without notice.