The RNRB is available where, on your death, your main residence passes to direct descendants.
There are rules to preserve the relief where, for instance, you ‘downsize’ and retain the additional capital. Careful planning and record-keeping is required.
For Estates in excess of £2m, the RNRB is reduced by £1 for every £2 that the net estate (before any reliefs or exemptions) exceeds £2m.
The Net Estate and liability to IHT take into account:
The value of the assets at the date of Death.
The value of any liabilities at the date of Death (e.g. loans, mortgages, Income Tax).
The value of any gifts made in the seven preceding years.
The amount, if any, of IHT reliefs and exemptions available.
The amount, if any, of the Estate or gifts passing to a spouse or civil partner.
The NRB.
The RNRB.
Any NRB or RNRB available from a deceased spouse’s Estate.
Each individual will have a maximum combined NRB/RNRB of £500,000. IHT can often be reduced, and potentially reduced to £0, through careful and timely planning.
In considering IHT planning, your Will must be considered in conjunction with appropriate lifetime IHT planning, and must also take into account your income and capital requirements.
Spouses and civil partners are chargeable to IHT separately, so the available exemptions apply to each of them separately. Spouses and civil partners can make transfers to each other, in their lifetime and on death, free of both IHT and CGT. The percentage of any unused NRB and/or RNRB on first death is transferred to the surviving spouse or civil partner, to be used in calculating the IHT payable on the death of the survivor. The combined available nil-rate bands on the death of the surviving spouse or civil partner could therefore be up to £1m.
Care is needed when considering lifetime giving.
Deprivation of assets – gifts made in contemplation of avoiding contributions to Local Authority residential care costs can be subject to challenge and thereby be ineffective for those purposes.
Gifts with reservation of benefit – gifts are typically not effective for IHT purposes where the donor either continues to enjoy the use of the asset or starts to enjoy use of the asset again before death.
Immediate charge to IHT – certain gifts, typically gifts to a trust, are chargeable lifetime transfers (CLTs) and can give rise to an immediate charge to IHT.
Maintenance of income and lifestyle – when contemplating making lifetime gifts, consideration must be given to whether you have retained sufficient income and capital to preserve your desired lifestyle.
Capital Gains Tax (CGT) – most lifetime gifts of assets (other than cash) must be considered in conjunction with CGT. A gift is not a ‘bargain at arm’s length’ for CGT purposes and therefore is treated as a disposal by the donor at market value. Reliefs can sometimes be available to defer the CGT arising.
Where you make a gift that is not a Chargeable Lifetime Transfer (CLT), the transfer will represent a PET for IHT purposes.
If you live for seven years or more from the date of the gift, the asset gifted will not form part of your estate for IHT purposes.
Taper relief is available if you die between three and seven years from the date of the gift, but only where the gift then gives rise to an IHT liability.
It is important to select suitable assets for gifting to maximise the potential tax savings.
Trusts can be a useful mechanism to protect assets and beneficiaries, and can be created and utilised both in your lifetime and on death.
Gifts to trusts are Chargeable Lifetime Transfers, but placing appropriate assets into trust (for instance those that are valued below the available NRB, and/or those that attract IHT reliefs) can be extremely tax efficient.
It is important to note that many trusts have an obligation to submit annual Income Tax returns and pay Income Tax, and can also be liable to make IHT returns and pay IHT every ten years.
When considering IHT planning, it is important to consider the IHT reliefs and exemptions available. The main exemptions and reliefs are explained below:
Any outright gifts to any one person in a tax year are exempt from IHT if the total gifts to that person do not exceed £250 in that year.
Small gift exemption applies separately to each donee. It does not matter how many different donees there are, as long as each is given no more than £250 in a tax year.
If the gifts to any one donee in the same tax year exceed £250, the exemption is wholly lost in relation to that donee.
For transfers exceeding the Small Gifts exemption, the first £3,000 of gifts in a tax year are exempt from IHT.
Any unused amount of this annual exemption can be carried forward but only to the next tax year.
BR (also known as Business Property Relief BPR) is one of the most important IHT reliefs available as it reduces the value of certain assets liable to IHT by either 50% or 100%.
BR can be claimed either on death or on any other chargeable event – i.e. on a CLT or on a PET becoming chargeable.
BR applies to the value of qualifying assets, such as: shares in an unquoted trading company; a business or an interest in a business; assets used wholly and mainly for the purposes of a business.
APR applies to assets such as farmland and farm buildings gifted either during lifetime or on death. As with BPR, it reduces the value of certain assets liable to IHT by either 50% or 100%.
To obtain this exemption, you (or the executors of the Estate) must show that: a gift formed part of your normal expenditure; was part of a pattern of such giving; was made out of income; and you were left with enough income to maintain your lifestyle. We recommend keeping detailed records to support a claim in the future.
The value of funds in a registered pension scheme is typically not subject to IHT on your death.
The accumulation of pension funds therefore represents an opportunity for IHT planning.
Tax Tip | Gifting nowStart the seven-year PET ‘clock’ running by gifting assets during your lifetime to minimise the IHT payable on your death.
Tax Tip | Surplus incomeIf you have surplus income, consider making use of the exemption for (gifts) as normal expenditure out of income.
Tax Tip | Pension fundsConsider making additional contributions to your pension scheme. Additionally, consider exhausting other assets/investments during your lifetime instead of drawing from your pension fund, thereby leaving the pension fund as intact as possible.
Tax Tip | Wills and Powers of AttorneyReview your Will and Powers of Attorney regularly to ensure that they meet your requirements as effectively and tax efficiently as possible.
Tax Tip | ‘Skipping a generation’It is not unusual for children to be independently wealthy, such that assets gifted to them will simply be retained and passed to their own children. In such circumstances, ‘skipping a generation’ and passing assets direct to (say) your grandchildren can avoid the assets being subject to IHT in the hands of your children.
Tax Tip | Deeds of VariationIt is possible to vary a Will within two years of death. This can be valuable in redirecting assets to maximise IHT reliefs and minimise future IHT liabilities.
