Even though inheritance tax is a tax on death it is has continued to become more and more unpopular. As a result the government have made changes so that less and less people will become subject to it in the future. Since the reason why most people are subject to inheritance tax is because of the value of their home the changes only apply to their main residence. The government’s new residence nil rate band (RNRB) extends the point at which an individual begins to pay inheritance tax on their home. The RNRB is only available where the main residence passes to children - including step, foster or adopted or linear descendants on death. One important point to note is that the RNRB could be lost if the property is directed into a discretionary trust so wills should be reviewed to make sure that they are set up appropriately. The RNRB came into force at the start of this tax year at the rate of £100,000 and will rise by £25,000 each tax year to tax year 2020-21 when it will be £175,000 per person.
To show what affect this will have on estates we will compare the effect of the RNRB on a married couple dying with the first spouse dying in 2010 and the surviving spouse dying later. As the RNRB and NRB can be transferred between husband and wife on the death of the first spouse they will have both of their allowances on death. If the survivor was to die in the tax year 2016-17 with their estate consisting of nothing apart from their main residence worth £1 million there would be a tax charge of £140,000. If the survivor died in the tax year 2020/21 with the value of their home now at £1.1 million there would be £40,000 in inheritance to pay as shown in the table below.
Tax year 2016/17 | Tax year 2020/21 | |
Total estate at death | £1,000,000 | £1,100,000 |
Total NRB | £650,000 (£325,000 + £325,000) | £650,000 (£325,000 + £325,000) |
Total RNRB | N/A | £350,000 (£175,000 + £175,000) |
Estate subject to tax | £350,000 @ 40% | £100,000 |
Total tax to pay | £140,000 | £40,000 |
There are many different ways that you can reduce the amount of your estate that could be subject to inheritance tax that we would be happy to discuss. For any financial advice Bradbury Hamilton, are able to advise. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274 for more information.