BR Guide FINAL 20 Feb

13 12 THE IHT LANDSCAPE THE IHT LANDSCAPE Recent Developments 1.3 Developments in the IHT landscape that impact BR and the most recent developments to take note of are discussed in the following sections. The Residence Nil Rate Band (RNRB) One of the big drivers behind the growth in the number of estates liable for IHT has been rising house prices. While the average house price in the UK is currently £300,000, this masks what can be vast regional differences. In 2015 the Government introduced a new RNRB to try to address this. The RNRB has been called the most significant change to IHT in a decade and its main rules are: SOURCE: LAND REGISTRY UK HOUSE PRICE INDEX, SEPTEMBER 2017 AND FTSE ALL SHARE INDEX, SEPTEMBER 2017 RISING ASSET PRICES VS. THE NIL RATE BAND 1990 1995 2000 2005 2010 2015 1,000 2,000 3,000 4,000 5,000 £100,000 £200,000 £300,000 £400,000 £500,000 FTSE All Share The RNRB exempts the first £100,000 of a home’s value from IHT, in the estates of people who die after 6 April 2017. They must leave a residence to their direct descendant so that it is “closely inherited”. This is defined to include children, grandchildren, step-children, adopted children, foster children and the spouses of all these people. It will increase by £25,000 every April until 2020. By 2020 it will reach £175,000 per person (and therefore £350,000 per couple). Adding this to the couple’s nil rate band, this equals £1 million per couple. From April 2021, it will increase in line with CPI inflation every year. The RNRB will be reduced by a rate of £1 for every £2 the value of the estate exceeds £2 million. Unused RNRB can be passed from one partner to the other provided they are married or in a civil partnership. It’s the unused percentage of the RNRB that’s transferred, not the unused amount. DOWNSIZING There are also provisions to accommodate downsizing property where the deceased has died on or after 6 April 2017, and on or after 8 July 2015, downsized to a less valuable residence or sold their residence (maybe to move into a residential home or to live with a relative) and left assets of an equivalent value to direct descendants. In these instances, the RNRB band will be preserved and referred to as the ’additional RNRB’. This cannot exceed the RNRB for the tax year in which the death occurred. There is no limit on the period between the downsizing and the date of death or the number of times between 8 July 2015 and the date of death that a person downsizes. A part of, or share of the property may be disposed of and the entitlement to the additional RNRB retained. If the property is given away, the additional RNRB is available if assets of an equivalent value are left to direct descendants. For the purposes of the additional RNRB, the value of the property is the net value after deducting any mortgage or other charge secured on it. To be clear: this means that anybody without a property, whose beneficiaries are not lineal descendants, or who disposed of their property before 8 July 2015 can’t benefit from the RNRB. It is also only applicable to one property and that property must have been the residence of the deceased at some point. Buy-to-let properties are excluded. However, where there are multiple homes, the property which qualifies for the relief can be chosen by the estate executor and, as with the NRB, any unused RNRB can be passed on to the surviving spouse or civil partner. It is the unused percentage of the additional threshold that’s transferred, not the unused amount. HMRC describes the calculation in two steps: Step 1. Work out the percentage of additional threshold that wasn’t used when the first of the couple died. You do this by dividing the unused amount of additional threshold by the total additional threshold that was available when the first of the couple died and multiplying the result by 100. If the person died before 6 April 2017 the unused additional threshold and total available additional threshold are both deemed to be £100,000 so the unused percentage is 100%. Step 2. Multiply the percentage of additional threshold that was unused when the first of the couple died by the maximum additional threshold available at the time of the survivor’s death. This gives you the sum available to transfer. For further details, see: https://www.gov.uk/guidance/inheritance-tax- transfer-of-threshold#history The limitations on the use of the RNRB will leave high numbers ineligible to apply it to their estates, meaning that other options will likely still be required. BR can also be used in conjunction with gifts and trusts so that the value of the estate can be reduced below £2 million and the full RNRB could be available to set against the taxable estate. Examples of how BR can assist in RNRB-related scenarios can be found in the Case Study sections – 5 & 6 - of this guide. In addition, updated HMRC Guidance with examples of downsizing scenarios can be found at: https://www.gov.uk/guidance/how- downsizing-selling-or-gifting-a-home-affects- the-additional-inheritance-tax-threshold Transfer of unused RNRB FTSE ALL SHARE NIL RATE BAND UK AVERAGE HOUSE PRICE LONDON AVERAGE HOUSE PRICE