How to benefit from an additional tranche of relief from inheritance tax

The increase in the value of farmland and rural property means that many people need to review their potential inheritance tax (IHT) and ensure that they qualify for a recently introduced relief.

Each individual taxpayer has an IHT-free amount, known as the Zero Rate Band (NRB), of £ 325,000 applied to their estate on death, meaning that assets up to that limit can be inherited into tax free.

However, in 2017, an additional allowance called the zero residence tranche (RNRB) was put in place. It currently stands at £ 175,000, bringing an individual’s total combined allowance without potential IHT to £ 500,000.

See also: Advice on maintaining deductions on agriculture and inheritance

No IHT is due on property transferred to a spouse or civil partner. Additionally, an individual’s unused NRB and RNRB can be passed on to a surviving spouse or civil partner, doubling their allowance, so that £ 1million from the survivor’s estate can be passed without IHT. .

The application of the RNRB mainly benefits estates worth less than £ 2million, and since this is a relief that some current wills do not capture, a review is worth it, suggests the specialist. estate planning Georgina Smith of the law firm Naphhens.

While many farm assets qualify for Farm Property Relief (APR), meaning that they are in any event exempt from IHT, the farm may not always be eligible for full relief on farm property. APR.

The RNRB can therefore be interesting because it is not based on any criterion of agricultural exploitation of the residence.

Tax advice for the consideration of the RNRB

  • Review wills regularly, not only for RNRB purposes, but in general – a change in personal circumstances such as marriage can dramatically change the legal and tax landscape
  • When the value of an estate (or the combined assets of a married couple / civil partners) approaches £ 2million and residential property is included in the assets, this should be an indicator to review plans
  • When an individual’s assets are worth more than £ 2million, consider measures such as lifetime asset donation to reduce the value of estates
  • When wills specify that a child will only inherit at a certain age, this should be reconsidered with regard to the family home
  • Although changes to the IHT have been anticipated for several years, the likelihood of this is increasing, making a will and estate review more urgent.

What to be aware of

The RNRB is only accessible to those who own a property in which they have lived at some point in their life and when this property is bequeathed to one or more direct descendants after the person has died or, in the case of a married / civil couple partners, they are both deceased.

Direct descendants for these purposes include children, grandchildren, stepchildren, adopted children and foster children. It is important to note that inheritance should not depend on reaching a specified age.

“Simply put, to qualify for RNRB you need to have an estate worth less than £ 2million,” says Ms Smith.

“Given the high value of agricultural estates, this often means that it is no longer tax advantageous to leave the estate of one spouse directly to the other spouse on the first death, as this could leave the estate of the second spouse. over £ 2million. “

As a result, the current practice of using mirror wills, with couples bequeathing their assets to each other, needs to be reconsidered.

A useful option now is to donate assets on the death of the first spouse, either directly to the children or to a trust, provided this does not result in an immediate IHT charge, with the aim of keeping the surviving spouse’s estate in the future. worth £ 2million, says Miss Smith.

There are provisions that help preserve relief for people who have had to downsize and move to lower value accommodation or a care home.

When an estate is worth more than £ 2million, a reduction applies, with the value of the RNRB relief reduced by £ 1 for every £ 2 of value above the £ 2million threshold. pound sterling.

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