Couple Planning Pension
  • 07 Jun 2017
  • jane.potter

In 2015 the Conservative Party promised to ‘take the family home out of tax by increasing the effective IHT threshold to £1 million’. As the law stands, this target will be met by 2020 through the introduction of the residential nil rate band (RNRB).

When the RNRB (worth up to £175,000) is combined with the main nil rate band (NRB) of £325,000, an individual can avoid paying inheritance tax on £500,000 of wealth on his or her death. When a married couple or civil partners combine their nil rate bands, they can shelter up to £1 million from inheritance tax, but only for deaths after 5 April 2020.

The RNRB can only apply if value derived from the deceased’s home is inherited by a direct descendent. Thus, the deceased must have a child, grandchild or great grandchild to pass the value on to (step-children, foster children and the spouses of all the above also count). The RNRB is applied to the entire estate on death, not just to the value of the home.

Any unused RNRB can be passed on to a spouse, just like the basic NRB. This also applies if the first spouse died before 6 April 2017. The RNRB is reduced by £1 for every £2 of the estate value which exceeds £2 million. The RNRB can also apply if the deceased sold their home on or after 8 July 2015 to downsize or to move into a care home.

The rules are certainly not straightforward, so we should discuss how your Will should be drafted to ensure the maximum relief is obtained.

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