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Business Tax  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Property  •  Tax Planning  •  Taxation

How to benefit from the new inheritance tax relief

By RJP LLP on 20 February, 2018

New £1M family home inheritance tax relief

Updated: 27th June 2019

The way inheritance tax is calculated on the family home has changed and it will soon be possible to pass on a family home worth up to £1 million tax free to your loved ones.

Known as main residence nil rate band tax relief, (RNRB) was first introduced on 6 April 2018.  It extends the existing lifetime exemption for inheritance tax purposes and enables a married couple or civil partners, to pass on property to the value of £1 million without incurring inheritance tax (IHT).

Currently, everyone gets a nil rate band of £325,000 and according to additional RNRB, they can now also get an additional £150,000 each, giving a total allowance of £950,000. From 6 April 2020 this will increase to £175,000, for the full £1m as a lifetime exception.

There are strings attached to these new rules and here are six of the most important conditions to be aware of, to ensure you or your family can potentially benefit:

Estate worth in excess of £2m do not qualify for RNRB, the additional relief is tapered away and ultimately withdrawn for an estate worth £2.35m or more. For anyone with an estate valued at between £325,000 and £2.35m, it is advisable to review lifetime planning and put appropriate steps in place if necessary.

The property being passed on must have been a qualifying main residence during the total period of ownership. If the property was a residence and then either no longer used by the individual or rented out at the time of death, this will not necessarily preclude the relief being available.

The property must be closely inherited for RNRB to apply. This means it must be inherited by either a lineal descendant, such as a child or grandchild (including an adopted child, step child or foster child), or a spouse, civil partner or (non-remarried) widow of a lineal descendant. After the inheritance, there is no obligation for beneficiaries to retain the asset to retain the relief.

Assets held in trust may not qualify for the relief if the trust means they are no longer within the deceased’s estate or not. For example, residential property held within a lifetime discretionary trust is not within the deceased’s estate and will not qualify, but if held within a life interest trust, the RNRB could be available. It is important that any trusts and wills are carefully reviewed to ensure possible issues are identified.

The RNRB is fully transferable if unused or partially used.

Where a taxpayer has downsized to a less valuable property, complex rules exist which impact whether the relief is available. Typically, three conditions must be met in order to qualify: the disposal must have taken place either on or after 8 July 2015; the former home must otherwise have qualified for RNRB, e.g. worth less than £2m; and the deceased’s direct descendants must inherit at least some of the remaining estate.

Many people have argued that the RNRB is unfair because it discriminates against people who cannot qualify because they do not have direct descendants to pass property onto. This does seem unfair and perhaps in years to come the qualifying criteria will be revised to make the tax relief more widely accessible.

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