The New Inheritance Tax ‘Home’ Allowance
How will your planning or plans be affected?
From April 2017 a new home allowance will be available under the Inheritance Tax rules. This is formally known as the Residence Nil Rate Band (RNRB), which has the effect of extending the existing £325,000 Nil Rate Band – the amount of estate value you have as an individual which can be passed down tax free – by a further £175,000. The full benefit of this is being introduced in stages, with the initial figure being £100,000 (in tax year 2017/18), increasing by £25,000 per year for each of the three years after that.
As the name implies, this additional element can only be offset against a residence owned (or previously owned) by an individual, which is left to their direct descendants. Although this looks like a simple addition to the rules, it is somewhat complex in its scope, there are so many varying provisions and qualifying factors.
To help with this we have written a short guide which will explain all the various aspects, what you need to look out for and how you can ensure you make the most of this in your circumstances.
To obtain your FREE COPY of this guide please click here – this will allow you to check and review the way this new allowance could affect your family position. Most importantly, you can check how it may influence your ongoing financial planning.
Beyond this new additional element to the existing allowance there are factors relating to Inheritance Tax (IHT) which are always worthy of comment:
- The number of people being caught in the IHT net has increased steadily for some years now, partly this is due to rising house prices, but also due to the fact that the main Nil Rate Band (£325,000) has been frozen for many years. A frozen allowance is similar to an increase in tax, because it drags more and more people into the fold. It is one of those stealth methods government use to take more tax without increasing rates of tax. The new home allowance will help alleviate this somewhat, but more people than ever are slowly reaching a point where they may well be affected by IHT.
- IHT is a tax which – with forward planning – is relatively easy to avoid.
- In any event, IHT planning is not the same as estate or succession planning, and it is these latter things which are arguably more important. IHT planning is all about tax reduction or mitigation, estate planning is all about ensuring your hard earned wealth and savings end up in the right hands at the right time. This is bloodline planning, not tax planning. For nearly everyone, regardless of wealth or estate size, this is crucial. Where do you want your assets to end up, with whom, how and when? This is most important, because the biggest threat to reduction in family wealth does not normally come from future taxes, such as IHT, but from social impacts such as divorces, bankruptcies and care fees. If you wish to explore more about this then we have a guide relating to trust planning, covering all these points, which you can download here
- Although the number of ‘estates’ which are caught by IHT each year is a proportionately small number of the total, there is still a widespread effect on a large number of people. For example where an individual dies and leaves an estate of £1,250,000 (assuming this is the second death of a couple and is based on the current allowances) the IHT bill is £240,000. If the deceased arranged for their estate to be equally divided between their four children, each of those children’s inheritance is reduced by £60,000. So four people (the children), and their families, are all affected. The IHT effect is like a wave because it spreads through the family structure.
- IHT is most commonly relevant on death and normally, for a couple, on the second death. This is important because for many people – making plans to protect their families – the reality is that the day of reckoning, when IHT may be a real issue, is likely to be well into the future. Possibly many decades. In that respect the actual IHT legislation which could apply on your estate could be changed multiple times by then. Iin particular those who think they are ‘safe’, because under today’s rules and rates they are not ‘in the net’, may still want to take protective planning steps.
The introduction on 6th April 2017 of the Residence Nil Rate Band is a welcome additional tax break. If you believe this is of relevance to yourselves then it is desirable to review your existing plans, Wills and any other aspects of your future estate planning. The complex nature of how this rule will apply means that ‘making the most of it’ may require some tweaking of your current position.
It is also likely that this could spark a more general review of your overall estate planning and succession plans within your family structure, an exercise always worth undertaking.
To organise such a review please contact us here