The New Residence Nil Rate Band – How To Qualify for the IHT Uplift

No one wants to be hit with a huge Inheritance Tax bill after a bereavement. However, new measures have recently been introduced to reduce this taxation, meaning you can leave more for your loved ones. 

What Is the Residence Nil Rate Band (RNRB)?

A measure that enables an additional amount of your estate to be passed on tax-free, the RNRB was introduced in 2017. Currently held at a fixed rate of £175,000 until 2026, RNRB is measured against the family home’s value, meaning that an additional £175,000 can be passed on tax-free after your death. 

However, there are some stipulations in using the RNRB, including:

  • Property must be passed down to correct descendants such as children (including adopted, fostered, and step-children) or grandchildren, but not nieces and nephews.
  • Discretionary trusts cannot be used to pass on the home, but other types of trusts do qualify. 
  • Estates – not just the property – valued at over £2m will see the additional tax-free relief from the RNRB tapered off at £1 for every £2 of value. There is, therefore, no allowance on estates worth £2.35m.  

How Does This Differ From the Nil Rate Band?

The nil rate band (NRB) is the Inheritance Tax threshold that limits what is payable on the value of estates. You may have also seen it referred to as IHT (Inheritance Tax). It is currently set at £325,000 – no tax is payable up to this limit. 

Should a value of an estate exceed this limit, tax is payable at a rate of 40%. Though this sounds extreme, this tax is only payable on the difference between the threshold and the inheritance. For example, on an estate worth £500,000, you would pay IHT on £175,000, as £325,000 is tax-exempt. 

The NRB and RNRB can be combined to allow individuals to pass on a maximum of £500,000 tax-free. However, there are certain ways to limit the amount of IHT tax you need to pay. 

Lowering Your IHT

Along with the tax relief that the NBR and RNBR offer, there are several other ways to lower your IHT effectively:

    • Gifts – You can give away up to £3,000 per year and small gifts of up to £250 to reduce the amount of IHT that you pay. Gifts to registered charities, churches, and museums are also IHT exempt. Exemptions apply to gifts made to people getting married. 
    • Leaving assets to your spouse – Anything you leave to your spouse or civil partner is entirely exempt from IHT. 
  • Potentially exempt transfers (PETs) – Gifts not covered by the exemptions listed above may qualify as PETs. If you survive for seven years after making a large gift, it will not be included within your estate, and therefore no IHT will be payable. However, the full IHT rate of 40% is applied for gifts offered less than three years before death. Each year after this, the rate reduces by one fifth. Essentially, this means if you pass away five years after making a gift, only 24% IHT will be applied. After seven years, the gift is fully IHT exempt. 
  • Trusts – The tax treatment of trusts is a complicated subject that depends on various factors, including who the trust’s beneficiaries are and the value of the assets. However, they could still be a valuable way to reduce the amount of IHT that would be paid upon your death, so consult with a specialist to determine which one would be right for you. 

Spouses can also carry over Nil-rate bands. If the first partner to die does not exceed the NRB and RNRB threshold, then they leave the second partner with a proportionate increase in their NRB when they pass. 

For example, if a wife dies and leaves everything to her husband, her estate is IHT exempt. The husband will then benefit from his NRB being doubled upon his death, meaning that he could leave up to £1m tax-free to his chosen beneficiaries. 

Plan Ahead

Inheritance Tax is a complicated area of the law that allows for ample planning. It is vital to make solid plans to benefit from a lower rate of IHT. However, it is important not to make these plans too complicated – IHT is constantly changing, as shown by the increases in RNRB over the past several years. This could mean that the plans you put in place may be difficult to undo if the law changes.

It is also sensible to be cautious about reducing the value of your estate. Although this will reduce the amount of IHT payable, the assets you give away may be gone forever, for instance, if you gift something to your child that they later lose in a divorce. 

Early planning allows you to reap the most rewards, but late planning is better than not planning at all. You can still take advantage of using your gift allowance and consult with specialists to put a plan in place.

We Are Here To Help

Tax law is confusing. It can be easy to overcomplicate matters or have no idea where to start. But fear note, we are here to help. 

At The Planning Bee, we provide comprehensive later life planning to ensure the best outcome for you and your loved ones. Contact our team of expert paralegals today for a free consultation.

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