Couples could now save an extra £20,000 of inheritance tax (IHT), as the residence nil rate band (RNRB) increased in April 2018.
The RNRB was increased at the beginning of this new tax year and it will increase by £25,000 in each of the next two tax years, finally reaching £175,000 in 2020/21. After that, it will be indexed to the Consumer Price Index. The RNRB was introduced to give married couples and civil partners an eventual total Inheritance Tax exemption of £1 million. This new band was introduced rather than increasing the existing IHT nil rate band, which has now been stuck at £325,000 since 2009.
The increase is clearly very good news, however the RNRB does create a lot of complexity for the taxpayer. For example, the £125,000 band is reduced by £1 for each £2 of estate over £2 million and so in 2018/19 your RNRB is lost completely if your estate exceeds £2.25 million.
Remember, the estate value is calculated at death and so if gifts are made only days before death to reduce the estate below the £2 million threshold, the RNRB is not lost – a potential tax saving of up to £50,000 at present. In addition a surviving spouse or civil partner can double that saving by inheriting any unused RNRB from their partner.
Complexities such as this mean that, between April and December 2017, just over 3,000 estates claimed the RNRB, compared to 24,000 that paid IHT, according to statistics obtained via a Freedom of Information request.
If you have not reviewed your estate planning in the light of the RNRB, it makes sense to do so. The RNRB can encourage deathbed gifts, as outlined above. In some instances, it can also mean couples should revise their wills to avoid leaving everything to the survivor on first death.
Come and talk to us about Inheritance Tax planning and IHT strategies – contact us to arrange a meeting with one of our Expert IFAs.
Please Note: The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.