The way properties are judged for Inheritance Tax is about to change.
This month (April 2017), the new Residence Nil Rate Band (RNRB) will be introduced. This new band will allow parents to hand more of their estate over to their children without having to pay Inheritance Tax.
Currently, an individual does not pay Inheritance Tax on an estate worth less than £325,000. This increases to £650,000 for couples.
However, the RNRB, something which former Chancellor George Osborne announced, means an end to Inheritance Tax on the family home for most of us. It is essentially an extension to the current tax-free allowance, but applying solely to property. It initially stands at £100,000, but will increase over the next four years until hitting £175,000 in 2020/21.
In order to qualify for the RNRB, the estate must include a qualifying property – basically a property that the deceased lived in at some point during ownership. That property must also pass to a direct descendant, such as a child or grandchild. Finally, the value of the estate cannot exceed £2 million. For every £2 over this limit that your estate is valued, the relief is reduced by £1.
It could save families a huge amount in tax. Things can, however, become complicated if the property is held in Trust.
Why hold a property in Trust?
Trusts can be very useful for people who want to cut their Inheritance Tax bill. By putting certain assets – like a property – into a Trust, they are not viewed as being part of your estate when the time comes to work out what Inheritance Tax your loved ones will have to pay.
While some forms of Trust will benefit from the RNRB, others will not.
The RNRB will only be available with the following Trusts:
- A Bare Trust for a lineal descendant
- An Immediate Post Death Interest Trust for a lineal descendant
- A disabled person’s Trust for a lineal descendant
- An 18-25 Trust
- A bereaved minor’s Trust.
Other Trusts will not benefit, for example if the property is left to a Discretionary Trust, RNRB will not be available, even if the beneficiaries of the Trust are a lineal descendant.