When a loved one passes away, the family’s grief is often compounded by concern about the “T” word – Tax. Chargeable at 40%, it can often be a real concern for families, especially when assets are tied up in property and not immediately realisable, but inheritance tax must be paid before a Grant of Representation can be issued.
However, if you could pass up to £1 million to your children without paying any inheritance tax would you be interested? If so, read on.
How much can a person inherit before paying inheritance tax?
The amount that an individual can pass free of inheritance tax when they pass away, called the Nil Rate Band, has been frozen at £325,000 until 5 April 2026. When passed from spouse to spouse, the unused amount can be claimed, giving an allowance of up to £650,000.
A further relief, called the Residence Nil Rate Band (RNRB), has now been frozen at £175,000 until the same date. The principle is that an estate will receive an additional allowance when a residential property is inherited by a lineal descendant. Again, in certain circumstances, this can be transferred, to give up to an additional £175,000.
What is the RNRB?
It is an allowance that serves to reduce the value of an estate that is subject to inheritance tax. It can be added to the Nil Rate Band and means that, if all the conditions are met, an individual can leave up to £500,000 tax-free and a married couple can leave up to £1 million. This only applies to deaths occurring on or after 6 April 2017.
How do I qualify for RNRB?
The RNRB applies to:
- Lineal descendants – this means a child but is defined widely within the legislation to include, for example, stepchildren, foster children, children under a Special Guardianship, and natural children who have been adopted by a third party. It does not include a child of a cohabitee.
- Inherited properties – this refers to the property being disposed of through a Will, under the Rules of Intestacy or “otherwise”.
What if the deceased had more than one property?
The RNRB is limited to one property only and only applies to residential property. However, there is no requirement that the dwelling is the deceased’s main property or indeed even situated in the UK.
If the deceased owned more than one property, all of which are closely inherited, the personal representatives must decide upon which property they are to claim the relief. The deceased must have lived in the property at some point, even if this was not immediately before their death, and therefore it does not apply to buy-to-let properties for example.
What about property left on Trust?
Depending on the type of Trust that is created, the RNRB may be available. However, certain Trusts can prevent the executor from being able to claim the relief.
How much is the allowance?
The value of the RNRB has now been frozen at £175,000 until 2026/2027. However, the amount that can be claimed is capped at the value of the residence being inherited.
It is of note that it is the proportion of the value of the residential property interest that is being closely inherited will dictate the value of the RNRB available, as opposed to the value of the property.
For example:
Andrea is divorced and has an estate of £1.2 million, including a property worth £500,000 (without a mortgage) in her sole name. Her Will leaves her entire estate equally amongst her two children and her two brothers. As such, 50% (the share to her children) is inherited by linear descendants. 50% of the property is £250,000 therefore Amanda’s whole £175,000 RNRB allowance is available.
However, if the property had been worth £150,000, again 50% would have been inherited by lineal descendants and therefore the RNRB would be limited to £75,000.
The availability of the RNRB is a valuable relief that can make a significant difference to the tax position. Therefore, the amount that intended beneficiaries can receive.
It is so important to make sure that your Will fits your circumstances and that you are making the most of the available exemptions.
Need advice concerning your Will or RNRB?
Helen Salisbury is a Partner in our expert Wills & Probate team, specialising in Wills, Inheritance Tax planning, administration of estates, grants of Probate, and Powers of Attorney.
If you would like to review your Will and the availability of tax exemptions in more detail, please contact Helen or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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