Is It Time to Review Your Estate Plan?

Estate Planning

Planning to minimise the inheritance tax (IHT) due on your estate is always important, but the recent introduction of the residence nil-rate band (RNRB) means now could be the ideal time to review your existing plans.

What is the RNRB?

IHT is charged at 40% on estates worth in excess of the nil-rate band, which is currently £325,000. Married couples and registered civil partners can pass any unused nil-rate band on death to one another.

However, 6 April 2017 saw the introduction of an additional nil-rate band – the RNRB – which is intended to take the family home out of IHT for all but the wealthiest. The RNRB is set at £100,000 for deaths in 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. It is then set to increase in line with the Consumer Prices Index from 2021/22 onwards.

The introduction of the RNRB means that up to £1 million of a married couple’s estate could eventually be taken outside the scope of IHT if the full nil-rate bands (£325,000 + £175,000 x 2) are available to each spouse.

The RNRB is also available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.

It is important to note that the additional band can only be used in respect of one residential property, which does not have to be the main family home but must at some point have been a residence of the deceased.

There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million (at a withdrawal rate of £1 for every £2 over this threshold).

Reviewing your estate plan

It is always advisable to review your Will and planning strategies on a regular basis, but it is particularly pertinent following changes in your personal or family circumstances or significant new tax rules. The introduction of the RNRB is one such example.

The additional nil-rate band will only apply when a main residence is passed on death to one or more descendants (including a child, stepchild, adopted child or foster child) of the deceased and their descendants. In order to utilise the RNRB, you may need to review your Will to check that the property is being bequeathed to the correct beneficiaries. The home doesn’t have to be specifically mentioned in the deceased’s Will, as long as it has at some point been a residence of the deceased.

It is also important to review your Will where property has been left in trust, as certain types of trusts may not be eligible for the RNRB. This is a complicated area and we suggest that you consult an expert for further advice.

If downsizing is contemplated, special care is needed to include provisions in a Will which will satisfy the conditions of obtaining the additional band.

For more information on the RNRB or for advice on other tax-efficient estate planning strategies, please contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

To Have, Hold & Share Rental Income Tax Efficiently

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As of 6 April 2017 the tax relief landlords receive for mortgage interest and other finance costs is restricted. The restriction is being introduced gradually so that by 2020/21 landlords will receive tax relief for finance costs at basic rate (currently 20%) instead of at the rate at which they pay tax.

This change does not just affect higher rate taxpayers.  Some people may find that, even though they are currently a basic rate taxpayer, as finance costs are no longer deducted in calculating their net rents, their income can be pushed into the higher rate bracket.

For spouses and civil partners who jointly own rental property, in the absence of an agreement to the contrary, the profits will typically be split 50/50. This can however be inefficient for tax purposes if one spouse is a basic rate taxpayer and the other is taxed at higher rate.

In such circumstances, they can register a beneficial ownership on the asset which stipulates a different ownership split, for example 80/20 and submit Form 17 to HMRC in order to tax the profits as such. This should of course be discussed with the experts in application to your personal circumstances before implementing.

If you’d like any further information please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.