Taking £1m out of Inheritance Tax – as safe as houses?

Finally the Government has realised that Inheritance Tax (IHT) reliefs have been falling short.  In the lead up to the 2015 election the Tory party promised to take £1m for a married couple outside of IHT.  Great idea.

Whilst the promise has been kept in principle, the detail is far more complicated than it needs to be.  Rather than just increasing the IHT tax free amount (called the Nil Rate Band) to £500k per person, HMRC have introduced a new (or additional) Nil Rate Band called “The Residence Nil Rate Band”) (RNRB).

The RNRB is potentially worth IHT savings of between £40k and £140k so it is important to understand how it works and what you need to do to benefit from it.  Your Estate will be able to take advantage of the RNRB in addition to the existing Nil Rate Band if you leave your home to direct descendants such as children or grandchildren.  Even if you leave your home to your spouse (or civil partner) rather than children or grandchildren, the RNRB may not be wasted as it can be carried forward to be used by your spouse/civil partner in the future.

So, what is the RNRB worth?  From 6 April 2017 the RNRB will worth £100k, which when combined with the normal Nil Rate Band, gives an IHT free amount of £425k.  The RNRB increases by a further £25k year on year until 2020/21 when it reaches a full £175k per person.  Add this to the Nil Rate Band and double it for a married couple (civil partners) and you have your magic £1m of IHT free allowance.

However, predictably it is not as simple as that!  If your total Estate is worth more than £2m the RNRB is tapered down to reduce the relief by £1 for every £2 over the £2m threshold.  But, if you have a more valuable Estate, it may not mean that you have to miss out on the relief entirely as it can be possible to rearrange your affairs so the RNRB can be claimed.

To ensure you maximise the tax free effect of the RNRB you should review your Will and Estate planning arrangements to make sure you are in the best possible position to take advantage of it.  If you would like help understanding the ramifications of all of this the Private Client Team at Howard Kennedy LLP would be pleased to help.

Liz Palmer

Partner, Head of Private Client & Family, Howard Kennedy LLP