Inheritance tax is an emotive subject, not least because it comes at a time of significant personal loss, but also because of the nature of it being a secondary capital tax.  One that many feel is an additional tax, on top of assets that have already been subject to income tax before.

Our previous inheritance tax blog gave a brief run-down of what, why and how inheritance is applied.  Here we take a deeper look at Residence Nil Rate Band (RNRB) that many individuals and couples can benefit from, and most importantly plan for.

Residence Nil Rate Band (RNRB)

As a quick recap everyone has a £350,000 nil rate band (NRB) by which no IHT is due on the first £350,000 of your estate.  For married couples this can be passed on, with a total of £650,000 available before IHT is applied.

As an extra bonus there is an additional allowance – your Residence Nil Rate Band, and there’s a big clue in the name.

This allowance is applied to the residence where you live (or have lived), so not applicable to any investment, buy-to-let, or holiday properties and offers an additional £175,000 worth of assets that can be passed on exempt from IHT.

This means as an individual, I can pass on potentially £500,000 and as a married couple we can pass on between us potentially £1 million worth of property, before inheritance tax is due.

Of course this is good news, but with any tax there are conditions, pitfalls and bad news elements to consider.

Closely Inherited

 The first condition to consider is that property needs to be closely inherited.

What that means is you’re passing property to somebody in your direct bloodline – your children, your grandchildren (or spouses thereof).

This isn’t an allowance that indirect relative can benefit from – not nephews, nieces, cousins, aunts, uncles, this is only applicable to children in your bloodline.

If it’s closely inherited, you can pass up to £1 million (as a married couple) without having to pay inheritance tax.

Larger Estates

HMRC will always look to claw back extra where possible, and this is where high value estates pay the price.

For estates valued over £2million, HMRC claw-back the RNRB.

HMRC reduces the level of RNRB an estate can claim by £1 for every £2 that the estate is valued over £2million.

This means that by the time an estate is £2.35M, you’ve lost your RNRB, or as a married couple, by the time your estate is £2.7M, you’ve lost the RNRB entirely.

A topic worth some thought and consideration, especially if the values might apply to you. If it is, you might want to consider seeking professional advice to explore strategies which can help you mitigate that tax bill and pass on more to your children.

Taylormade Financial Management is a long established Independent Financial Advisory practice and well equipped to help clients chart the turbulent waters that surround budget announcements.  Our mission is to provide first-class financial planning advice to individuals, companies and trustees.

Important Disclosure: content provided does not consider individual circumstances and does not constitute personal advice.  The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.