RISING HOUSE PRICES MAY LEAVE YOUR LOVED ONES WITH LESS THAN YOU THINK
by Paul Caslin , Wills , Tax and Trust Solicitor at Aaron & Partners LLP
HM Revenue and Customs collected an extra £ 729mn over the past year in inheritance tax receipts , the largest single-year increase in five years . The Government ’ s final inheritance tax taken for the financial year 2021 / 22 came to £ 6.1bn , up 14 per cent on the previous year .
While inheritance tax has historically been a tax on the wealthy , with property prices rising and most personal tax allowances frozen until April 2026 , many people are accumulating wealth and being forced beyond their personal nil rate band threshold of £ 325,000 for inheritance tax . In June 2022 , the average cost of a UK property was £ 294,845 , compared to £ 154,716 in April 2009 when the personal inheritance tax nil rate band was last reviewed .
In 2017 , acknowledging the inheritance tax problems being faced by increasing numbers of homeowners , the Government introduced an additional inheritance tax allowance of up to £ 175,000 to apply to the family home in certain circumstances . The new allowance , known as the residential nil rate band allowance ( RNRB ), is designed to allow married couples and civil partners to pass on combined assets worth £ 1 million , including the family home , without paying any inheritance tax .
However , not everyone will benefit from the RNRB , and there are a few rules to be aware of :
1 . The RNRB can only be claimed if the deceased owned a property that was at one time their home and is generally capped to the value of the home if that is worth less than the RNRB . If the deceased owned more than one property , their executor will need to decide which property should benefit from the RNRB , since it does not have to be set against the deceased ' s main residence . Careful consideration may be needed to determine the most tax efficient manner by which to claim the maximum RNRB .
2 . The RNRB can only be claimed if the property is being left to the deceased ’ s direct descendants ( such as children or grandchildren ). For the RNRB , direct descendants will also include the deceased ’ s spouse ( or civil partner ) and the deceased ’ s step , adopted or fostered child or a child for whom the deceased was a legally appointed guardian . This is the extent of relatives who can benefit from the RNRB .
3 . Generally , if the deceased does not own property at death then the RNRB is not available . However , the need to preserve the
RNRB for those who sell a home ( e . g ., to fund residential care fees ) has been recognised , particularly if the former home would otherwise have qualified for the RNRB . This is called downsizing relief and is beyond the scope of this article . However , anyone who gifted or disposed of their home before 8 July 2015 will not benefit from the RNRB .
4 . The RNRB will reduce by a rate of £ 1 for every £ 2 by which the deceased ’ s estate exceeds £ 2 million . The effect is the RNRB is not available for estates worth more than £ 2.35m ( or £ 2.7m where a deceased spouse ’ s unused RNRB is also claimed ).
5 . Homes in some types of trust may complicate , or even remove , your executor ’ s ability to claim the RNRB . Whether a claim for the RNRB can be preserved will depend on the terms of the trust and whether the trustees have the powers to take additional steps in favour of direct descendants before or within two years of death .
In short , the RNRB is not as straightforward as it might initially appear and requires scrutiny beyond the headlines that suggest married couple and civil partners have £ 1m of assets to leave inheritance tax free . Unlike the personal nil rate band , the RNRB is not universally available but subject to nuances and circumstantial application . Appropriate legal advice will help you to understand whether your estate shall qualify for the RNRB . Those who cannot rely on the RNRB but wish to undertake estate planning exercises will therefore likely need to explore other ways and means of reducing the potential IHT liability on death . There are several steps that can be taken to minimise an inheritance tax liability , and to ensure that assets may be passed on in a tax efficient manner with careful planning , but it is key to plan as early as possible with professional advice .
For further information , please contact :
Paul Caslin Wills , Tax and Trusts Solicitor Aaron and Partners LLP 01244 405411 Paul . caslin @ aaronandpartners . com
wirrallife . com 51