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Residence Nil Rate Band (RNRB).

A new tax-free allowance was announced in the Summer Budget 2015 (the Residence Nil Rate Band) that will take effect on or after 6th April 2017.  Downsizing provisions have yet to be finalised.

There are a lot of myths and misconceptions surrounding this new allowance - please call or view our website pages (not yet updated) for further information - including:

  • everyone has a new allowance of £1M;
  • everyone can pass their home free of tax to their children

You may not get the full allowance (or double the allowance) if:

  1. your estate exceeds £2M
  2. you rent property
  3. you don't leave your property (or proceeds of sale) to the right qualifying people and in the right manner
  4. you are unmarried

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Inheritance Tax

What is Inheritance Tax and how to reduce the bill?

What is Inheritance TaxInheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2012-13). The tax is payable at 40 per cent on the amount over this threshold or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.

Increased threshold for married couples and civil partners

Since October 2007, married couples and registered Civil Partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or Civil Partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or Civil Partner when they die.

How can you reduce the IHT bill?

As part of any estate planning exercise you may ask us to undertake for you, we offer our clients several solutions to reduce the Inheritance Tax bill on your Estate which invariably involve the use of trusts.

Trusts can be set up either in your lifetime or on your death (i.e. via your Will).

Lifetime trusts can be used in the following cases:

  • lifetime tax planning;
  • accepting assets from your estate on your death (i.e. directed into them via your Will), for example business assets or a portion of or even the whole of your estate; and
  • keeping the proceeds of any life policies or death in service benefits out of your and your family’s taxable estates.

Trust provisions can also be written into your Will and are therefore not set up until your death.

Note that not all trusts are effective for Inheritance Tax so the correct type of trust must be created.

Out three key trusts for mitigation of Inheritance Tax are:

  1. the Nil Rate Band Trust, a Will trust which allows you to take maximum benefit of the tax-free allowances(1) already available to you;
  2. the Business Property Relief Trust which enables you to fully protect your business assets and AIM share portfolio from Inheritance Tax; and
  3. the Family Trust which is a lifetime trust and can be utilised in all the scenarios described above.

Note (1) From October 2007 new rules have been introduced relating to the Transferable Nil Rate Band for married couples and civil partners. However, there are still many reasons for drafting tax-efficient Wills using trusts despite this concession.