Blog: Could you leave wealth of £1 million . . . tax free?

Savers are being urged to review their retirement planning to take advantage of rules which could eventually allow married couples to leave assets of £1 million to their children tax free.

The first £100,000 of the value of your home is exempt from Inheritance Tax (IHT) provided it is passed to a “direct descendant” on death.

This Residence Nil Rate Band (RNBR) can be claimed on top of the £325,000 Inheritance Tax allowance and will increase to £175,000 in 2020.

With the ability to transfer both the IHT and RNRB between spouses, couples could potentially pass on wealth of up to £1 million without paying tax.

But what does all this mean in practice? While there will be winners, as always, some will lose out.

Current arrangements

At present, spouses and civil partners can pass on their wealth to each other tax free and this continues.

When someone dies, the current Nil Rate Band allows £325,000 of assets to be passed to future generations before tax, this will also continue.

A person’s Nil Rate Band can be passed between spouses, effectively taking the surviving partner’s allowance to £650,000. Once that threshold is passed, any further assets are taxed at 40 per cent. This will continue to be the case.

What does the RNRB mean for you?

The RNRB allowance is restricted to estates directly inherited by children, stepchildren, adopted children or grandchildren.

The starting RNRB allowance is £125,000 and this will increase to £150,000 in 2019 and £175,000 in 2020.

How you could miss out

The allowance is not available to couples without children, although others may consider remarrying to ensure their stepchildren benefit from the tax break.

A deceased person must have lived in the property at some time, meaning a buy-to-let property is not included. Also, only one property is eligible for the relief.

RNRB may also be lost if the property is placed in a trust, such as a discretionary will trust for children or grandchildren, although the allowance can still be claimed when the trust gives a child or grandchild absolute interest or interest in possession in the home. Bereaved Minor Trusts, 18-25 Trust and Disabled Persons’ Trusts will also retain eligibility.

Estates worth more than £2 million will be penalised – the allowance reduced by £1 for every £2 that the estate is valued over £2 million. In reality, it means no RNRB relief for assets of more than £2.2m – rising to £2.35m in 2021/22 (when the full £175,000 allowance kicks in).

Business owners are also likely to miss out. While most businesses can be passed on free from IHT through Business Property Relief, the value of the business is likely to push the estate through the £2 million threshold.

What next?

You may want to review your retirement planning and investigate the most tax-effective way to pass on your wealth to your family following the recent changes.

For example, if the family home is to be passed into a discretionary trust, missing out on RNRB could add a hefty amount to your Inheritance Tax bill.

This highlights the need for careful planning and professional advice to constantly review your strategy to cater for changing circumstances and to ensure you make the most of the opportunity to pass on a larger chunk of the family home tax free.