Ever since 6th April a new Inheritance Tax (IHT) allowance has been available, the effect of which will be to reduce the amount of IHT payable in respect of certain estates.
The new allowance, known as the Residence Nil Rate Band (RNRB), applies when residential property is left to direct descendants. It will result in an additional £100,000 of IHT Nil Rate Band (the term for the IHT free allowance) in 2017-18, rising to an additional £175,000 in 2020-21.
It is envisaged that a married couple who leave all of their estates to each other in the first instance will have two residential property allowances to add to their existing IHT Nil Rate Band of £325,000 each and will therefore eventually have a combined IHT Nil Rate Band of £1 million.
There are restrictions on who can benefit from the new allowance. Direct descendants include children, grandchildren, step-children, adopted and fostered children and their spouses or civil partners. They do not include nephews, nieces and siblings.
The RNRB only applies in cases where the home, or part of it, was owned by the deceased and included in their estate. It does not need to be in the UK, but it must have been lived in at some stage by the deceased before their death. Any outstanding mortgage should be deducted from the value of the home before working out the impact of the allowance.
There is more than one reason why it might be necessary to rewrite a will to take advantage of the RNRB. First, people may feel they should take steps to leave the family home to their direct descendants so their estates can benefit from the new allowance. Second, it may be necessary to redraft wills to get rid of certain types of trusts which are not eligible for the RNRB, such as a discretionary will trust for the benefit of children or grandchildren.
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