New Inheritance Tax

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From 6 April 2017, a new Inheritance Tax (IHT) relief called the Residence Nil-Rate Band “RNRB” will become available for certain people to claim.

This will mean a further £100,000 free of IHT (increasing to maximum of £175,000 by 2020) in addition to the existing nil-rate band (NRB) of £325,000 (the current amount available free of IHT) for home owners leaving their property to direct descendants (children, step children or grandchildren) in their wills. Like the NRB, the new RNRB will be transferable between spouses. By 2020 it may therefore be possible to pass down a maximum of £1m free of tax to your children. Assets in excess of this will be taxed at 40%.

The RNRB (new Inheritance Tax) does have its limitations. It does not include nieces or nephews as “direct descendants” meaning that couples without children will not be able to benefit from this latest tax break. If your estate is worth more than £2m some or all of the RNRB will be clawed back, losing £1 of the allowance for every £2 in extra wealth. This penalty is called tapering, meaning that some families may miss out completely unless careful tax planning advice is sought. Relief will be available to people who sell their property or downsize but the rules are not straightforward. It is recommended to obtain tax planning advice before this is undertaken.

The new rules will change estate planning and may well render many existing tax planning wills inappropriate; in particular wills drafted before 2007 which include a tax planning trust. The RNRB does not extend to properties left into a trust so your trustees could have no choice but to dismantle the trust after your death to claim the RNRB. This could burden your estate with significant legal costs which could have been avoided had you taken advice and updated your will.  It may well be that your will can be simplified and the trust removed completely in light of the new regime.

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