Insights

New £1M family home inheritance tax relief

Updated: 10th September 2019

The way inheritance tax is calculated on the family home has changed and it will soon be possible to pass on a family home worth up to £1 million tax free to your loved ones.

Known as the main residence nil rate band, this new inheritance tax relief, (RNRB) was first introduced on 6 April 2018.  It extends the existing lifetime exemption for inheritance tax purposes and enables a married couple or civil partners, to pass on property to the value of £1 million without incurring inheritance tax (IHT).

What is the inheritance tax relief allowance?

Currently, everyone gets an inheritance tax nil rate band of £325,000 and with the  additional RNRB, they can now also get an additional £150,000 each, giving a total allowance of £950,000. From 6 April 2020 this will increase to £175,000, for the full £1m as a lifetime exception.

Pay the legal minimum: Six ways to ensure you can get maximum inheritance tax relief

There are strings attached to the new inheritance tax rules and here are six of the most important conditions to be aware of, to ensure you or your family can potentially benefit:

High net worth estates and inheritance tax

1. Estates worth in excess of £2m do not qualify for the inheritance tax RNRB, the additional relief is tapered away and ultimately withdrawn for an estate worth £2.35m or more. For anyone with an estate valued at between £325,000 and £2.35m, it is advisable to review lifetime planning and put appropriate steps in place if necessary.

Tax relief for main residence

2. The property being passed on must have been a qualifying main residence during the total period of ownership to get the tax relief. However if the property was a residence and then either no longer used by the individual or rented out at the time of death, this will not necessarily preclude the relief being available.

Inherited by close family / descendants

3. The property must be closely inherited for the RNRB to apply. This means it must be inherited by either a lineal descendant, such as a child or grandchild (including an adopted child, step child or foster child), or a spouse, civil partner or (non-remarried) widow of a lineal descendant. After the inheritance, there is no obligation for beneficiaries to retain the asset to retain the relief.

Trusts may not qualify for IHT relief

4. Assets held in trust may not qualify for inheritance tax relief if the trust means they are not within the deceased’s estate. For example, residential property held within a lifetime discretionary trust is not within the deceased’s estate and will not qualify, but if held within a life interest trust, it will be within the estate and the RNRB could be available. It is important that any trusts and wills are carefully reviewed to ensure possible issues are identified.

Tax relief can be transferred

5. The RNRB is fully transferable between husband and wife if unused or partially used on the firs death.

Downsizing and inheritance tax relief

6. Where a taxpayer has downsized to a less valuable property, complex rules exist which impact whether the tax relief is available. Typically, three conditions must be met in order to qualify: the disposal must have taken place either on or after 8 July 2015; the former home must otherwise have qualified for the RNRB, e.g. estate worth less than £2m; and the deceased’s direct descendants must inherit at least some of the remaining estate.

Inheritance tax for taxpayers without direct descendants

Many people have argued that the RNRB is unfair because it discriminates against people who cannot qualify because they do not have direct descendants to pass property onto. This does seem unfair and perhaps in years to come the qualifying criteria will be revised to make the tax relief more widely accessible.

partners@rjp.co.uk