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The Residential Nil Rate Band (RNRB) which was introduced in April 2017, means that couples with a home worth up to £1 million will be able to pass it on to their direct descendants without paying any inheritance tax. Many would believe the simplest method may be to gift your home to your children. However, this is fraught with danger, as should your children get divorced or become bankrupt, you may lose your home as part of a legal settlement.
At Bluebond Tax Planning, we provide our clients with a comprehensive solutions to all the legal,tax and financial planning elements, which is essential to provide you with the most suitable IHT advice
At the moment, the first £325,000 of a person’s Estate is free of inheritance tax. This is known as the Nil Rate Band (NRB is also known as the inheritance tax threshold). The Residential Nil Rate Band (RNRB) means you get an extra allowance if you own a home (up to £175,000 per person). The RNRB is also transferable on a spouses or civil partners death.
Families with Estates up to £1 million can avoid IHT as each parent will have a NRB of £325,000 and a RNRB of up to £175,000. If you do not own any property which you use as a home, you will not be entitled to the RNRB.
At the moment, the first £325,000 of a person’s Estate is free of inheritance tax. This is known as the Nil Rate Band (NRB is also known as the inheritance tax threshold). The Residential Nil Rate Band (RNRB) means you get an extra allowance if you own a home (up to £175,000 per person). The RNRB is also transferable on a spouses or civil partners death.
Families with Estates up to £1 million can avoid IHT as each parent will have a NRB of £325,000 and a RNRB of up to £175,000. If you do not own any property which you use as a home, you will not be entitled to the RNRB.
For Estates worth over £2 million, the Residential Nil Rate Band will be progressively tapered away by £1 for every £2 that the total Estate exceeds the taper threshold. This means that there will be no RNRB available for Estates over £2.7 million.
If you have been previously widowed, with careful planning and experienced advice, you can use 3 NRB allowances and 3 RNRB allowances.
In this event, you will have an extra allowance of £500,000. However, take care as it is essential the correct documents are registered in the correct order.
For Estates worth over £2 million, the Residential Nil Rate Band will be progressively tapered away by £1 for every £2 that the total Estate exceeds the taper threshold. This means that there will be no RNRB available for Estates over £2.7 million.
If you have been previously widowed, with careful planning and experienced advice, you can use 3 NRB allowances and 3 RNRB allowances.
In this event, you will have an extra allowance of £500,000. However, take care as it is essential the correct documents are registered in the correct order.
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There have been misunderstandings about the RNRB which could lead people to structure their finances in the wrong way. The Following 5 points highlight the things you should know about RNRB:
You can put part of your house into a Trust on first death of a married couple to avoid inheritance tax. The fees for setting up these types of Trusts are insignificant compared to the potential inheritance tax savings made.
If you ensure that any of your assets that potentially exceed the inheritance tax allowance are transferred to a Trust at least seven years before the death of either you or your surviving spouse, these assets will not be liable to inheritance tax.
Trusts and the legal wording involved is a very complex area and therefore experienced legal professionals should always be employed in this respect. It's not worth saving a small amount in fees to later find your planning does not work.
A gift of property made by a person on or after the 18th March 1986, is called a gift with reservation (GWR) as long as the person is still benefiting from the property, i.e. they are still living in it. In this event, the property will be included as a part of the gift-givers Estate for inheritance tax purposes, even if they legally no longer own the property.
When talking about a GWR, a gift can mean a sale which was made deliberately below the market value of the property.
For example, if a property was worth £1 million and a person sells it for £750,000. The transfer is part sale and part gift meaning the £250,000 loss to the Estate would be treated as a potentially exempt transfer. This means this would be included in the deceased’s Estate if they die within 7 years of the sale, even if they didn’t receive any benefit from the transfer.
You could gift a proportion of your home. This would still create the same problem as gifting your entire home to children (should your children get divorced or become bankrupt but not quite as risky.
If you gift a proportion of your main residence to your children, you will have to pay rent at a commercial rate on the proportion given away to satisfy the HMRC that an outright gift has actually been made. Capital gains tax will also be payable by your children on the gain in the proportion gifted to them.
If you gift part of the house in your early 70’s, the capital gains tax bill could be large.
Depending on the value of the house and the value of the Estate we can suggest different methods of mitigating the tax.
Gifting part of the main residence has complex implications on Income tax as well as Capital Gains tax. You should get experienced advice if you wish to gift any part of your main residence.
There have been misunderstandings about the RNRB which could lead people to structure their finances in the wrong way. The Following 5 points highlight the things you should know about RNRB:
You can put part of your house into a Trust on first death of a married couple to avoid inheritance tax. The fees for setting up these types of Trusts are insignificant compared to the potential inheritance tax savings made.
If you ensure that any of your assets that potentially exceed the inheritance tax allowance are transferred to a Trust at least seven years before the death of either you or your surviving spouse, these assets will not be liable to inheritance tax.
Trusts and the legal wording involved is a very complex area and therefore experienced legal professionals should always be employed in this respect. It's not worth saving a small amount in fees to later find your planning does not work.
A gift of property made by a person on or after the 18th March 1986, is called a gift with reservation (GWR) as long as the person is still benefiting from the property, i.e. they are still living in it. In this event, the property will be included as a part of the gift-givers Estate for inheritance tax purposes, even if they legally no longer own the property.
When talking about a GWR, a gift can mean a sale which was made deliberately below the market value of the property.
For example, if a property was worth £1 million and a person sells it for £750,000. The transfer is part sale and part gift meaning the £250,000 loss to the Estate would be treated as a potentially exempt transfer. This means this would be included in the deceased’s Estate if they die within 7 years of the sale, even if they didn’t receive any benefit from the transfer.
You could gift a proportion of your home. This would still create the same problem as gifting your entire home to children (should your children get divorced or become bankrupt but not quite as risky.
If you gift a proportion of your main residence to your children, you will have to pay rent at a commercial rate on the proportion given away to satisfy the HMRC that an outright gift has actually been made. Capital Gains tax will also be payable by your children on the gain in the proportion gifted to them.
If you gift part of the house in your early 70’s, the Capital Gains tax bill could be large.
Depending on the value of the house and the value of the Estate we can suggest different methods of mitigating the tax.
Gifting part of the main residence has complex implications on Income tax as well as Capital Gains tax. You should get experienced advice if you wish to gift any part of your main residence.
You can only select one property as your main residence for IHT purposes. Therefore, you should select the one with the highest value, provided it is never let out to other people.
You could gift the holiday home to your children over a number of years to reduce your Capital Gains tax liability. However, it may be better to gift it to a Trust. Any time you use the property you must ensure you pay full market rent for that time period.
People in this situation are able to claim 3 NRBs and 3 RNRBs giving them an extra £500,000 of allowances for IHT. Claiming this is quite complex planning which involves the use of Trusts and also how the RNRB if gifted. You should contact us to get advice on this type of planning as failure you do it correctly will mean the loss of the extra allowances.
It is important that either downsizing or selling of a home for care fees is recorded and that a claim is registered when you die within a few years. In a event, the RNRB can still be claimed. Therefore, it is important to get experienced advice in this scenario to ensure any claim is properly recorded and registered.
This will depend upon the value of the rental properties. There are often Capital Gains tax and income tax issues that also arise in this type of planning, It is possible to significantly reduce, and sometimes completely avoid, these taxes with careful experienced planning. It is very complex and each person’s plan must be individually set up to meet their own circumstances so please call us for help in this complex area.
If a second spouse or a divorced person dies with an Estate value in excess of £2 million, they will start to lose their RNRBs. On an Estate of over £2.7 million, This will mean and extra £140,000 in IHT.
This can be avoided with careful planning but it is complex so please contact us for advice.
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The information contained in this web site is for UK consumers only. Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.
