If you’ve ever struggled to get your head around inheritance tax (IHT), and how to protect your family from it, you’re not alone. It’s perhaps become even more complex since a new rule, the residence nil rate band (RNRB), came into force last April.
The RNRB is a tax break – an allowance to offset the cost of family homes and thereby reduce the amount of money in an estate resulting in a smaller IHT bill. The allowance is currently set at £100,000 and is set to rise to £175,000 in two years’ time.
But it’s not a straightforward tax break at all, with research from Old Mutual Wealth finding that 70% of people don’t understand how it works. In fact, to fully benefit, many people will need to review their current wills to be sure that their estate is arranged in such a way that it is eligible for the tax break.
Trusts, for example, have been a popular way to pass on inheritance to direct descendants but they do not necessarily sit well alongside the RNRB as property must be left to the descendants in a will to be eligible for the break. Even if a house is being left in a trust for the deceased’s descendants, the tax break won’t apply as the house is technically being left to a trust.
A number of other factors can affect whether the relief can be claimed, such as the age at which children or grandchildren are to benefit. Traditionally, you may have stipulated that they should be older than eighteen but that can now mean the estate would not be eligible for the RNRB.
Since the RNRB was introduced last year, Hutchinson Thomas’ probate department has enjoyed becoming more familiar with how it operates, with Head of Probate, Wills and Trusts, Louise Williams commenting:
“We have seen a number of cases where families could have reduced their IHT bill by having made some adjustments to their will. I’d strongly advise individuals to seek advice around their estate and then, if necessary, adjust the wording in their wills accordingly.”
It’s also relevant to note that IHT payments raised £5.3 billion last year, a 14.6% increase in comparison to the previous year. Many believe that this is a sign of stricter processing of IHT payments following the introduction of the RNRB and the potential knock on effect of less income for the treasury. A spokesperson from NFU Mutual said:
“It’s clear that the taxman is cracking down hard on inheritance tax by looking more closely at people’s estates and challenging claims for reliefs. You’d expect the introduction of the Residence Nil Rate Band would see receipts flatten out or even fall a little bit, but the opposite is happening.
When inheritance tax receipts rise, it’s usually because of a buoyant housing market. But property prices aren’t rocketing in the same way, so it’s difficult to see what could have caused such a sharp increase in receipts other than a more aggressive approach to inheritance tax”.
For advice about inheritance tax, writing a will or amending an existing one, get in touch with our WIQS accredited probate team on 01639 640150.