Keeping Up with Tax Allowances?

After many months of debate and the passing of new legislation, the ‘Residence Nil Rate Band’ or ‘RNRB’ was introduced in April to allow those planning on leaving their family home to future generations an additional inheritance tax allowance. Despite all the publicity, legal specialist Stuart Hyden is worried that those who should know about these new rules, still aren’t aware of them.

Inheritance Tax is undergoing a quiet revolution, allowing couples to leave tax-free assets worth up to £1 million by the year 2020.

‘Generally, I don’t think people planning their Wills fully understand how the RNRB works,’ says Stuart Hyden, a solicitors in the Wills, Trusts & Succession Team at Eric Robinson Solicitors. ‘Despite regular reports both in newspapers and online leading up to its introduction in the Spring, I think the new rules have yet to make their impact on the public consciousness, which is frustrating because it is a potentially generous additional inheritance tax allowance.’

After someone dies, Inheritance tax is charged at a rate of 40% on assets that exceed an individual nil rate band (and aren’t left to exempt beneficiaries such as charities or surviving spouses), which is currently £325,000.  With proper planning, married couples can transfer their nil rate band to each other, so a surviving spouse can have a combined nil rate band of £650,000.

Now, the additional RNRB has been introduced for those leaving a family home to the next generation (children, grandchildren, step-children or any children who have been adopted or fostered). Provided the home is of sufficient value, this starts at £100,000 per individual this year, and is set to increase by £25,000 a year until it reaches £175,000 in 2020.  Once more, with careful planning, married couples can transfer their RNRB to their surviving spouse.

So for married couples, in 2020, a combined nil rate band of £650,000 with two individual RNRB allowances of £175,000 means that their total inheritance tax allowance will potentially hit £1 million.

However, if someone’s total assets at the date of their death are likely to exceed £2 million, they may not receive the benefit of the RNRB.  This is because the available RNRB reduces by £1 for every £2 by which an individual’s estate exceeds this £2 million threshold.  All is not lost however and such a situation can often be salvaged with careful lifetime planning.

‘Admittedly, this is a complex area and needs specialist advice,’ says Stuart, who works in Eric Robinson Solicitors’ High Street offices in Bracknell. ‘But my concern is that if people aren’t aware of the new allowances, they might not have the reason to seek that advice.’