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The Residence Nil Rate Band - A New Chapter for Inheitance Tax Planning

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By Rachel Main

Changes to Inheritance Tax (IHT) legislation have recently been implemented and, as tax is consistently a hot topic, these changes introduce fresh considerations both for individuals writing a Will for the first time and for those reviewing existing Wills.

Presently, every person has a Nil Rate Band (NRB) allowance of £325,000. Put simply, this is the maximum sum a person can give away on death, without their estate becoming subject to IHT. Thereafter, IHT is paid on the balance at a rate of 40%.

The Residence Nil Rate Band (RNRB) has now been introduced and allows a person’s estate to benefit from an additional tax free allowance of £100,000, provided certain conditions are met. The RNRB is available to the estates of those who die on or after 6 April 2017 and who own a qualifying residential interest which is inherited by lineal descendants.

Broadly speaking, a qualifying residential interest is an interest in property which has, at some stage during the period of ownership, been occupied by the deceased as a residence.

A lineal descendant is a child, grandchild, adopted child and, interestingly, also includes a foster child or step child.

The RNRB is £100,000 for the 2017/2018 tax year, rising to £175,000 by 2020/2021 and following this is set to rise with inflation.

However, where the net value of the estate exceeds £2 million, the RNRB will be tapered so that the allowance shall be reduced by £1 for every £2 which exceeds the threshold. The estates of wealthy individuals could, therefore, not benefit from the RNRB at all.

Down-sizing provisions do apply and, if a person has either sold their residence or down-sized on or after 8 July 2015, there is a possibility their estate may still benefit from the RNRB.

Any unused RNRB is transferrable between spouses and civil partners in the same way as the NRB, so that it is still possible for spouses and civil partners to leave their estates to one another on the first death, if this perhaps remains desirable.

Whilst the RNRB will not apply to the estates of those without children, or to the very wealthy, it is still an important consideration for many and expert legal advice will be essential in ensuring your Will and assets are structured in such a way so as to maximise the prospect of your estate benefitting from the new rules.

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