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Currently, everyone has an inheritance tax allowance of
£325,000. This has been frozen since 2009 and will not change
until at least 2020. On your death, inheritance tax is payable
at the rate of 40% on everything over the £325,000 allowance. So
if your estate is worth £400,000, the inheritance tax bill would
be £30,000 (£400,000 – £325,000 = £75,000 and 40% of £75,000 is
The new Residence Nil Rate Band (“RNRB”) effectively increases
your inheritance tax threshold if you have a family home that
you intend to pass on to a ‘direct descendent’ – e.g. a child or
grandchild. Consequently this new allowance will not benefit
those who do not have children.
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The new RNRB allowance is being introduced gradually, as
A direct descendant, for the purpose of the new RNRB, of a
Currently, if you are married or in a civil partnership, any unused part of your inheritance tax allowance is inherited by your spouse/civil partner on your death. Assets left to your spouse or civil partner are free from inheritance tax anyway.
Therefore, that if a couple leaves everything to each other and one dies, the surviving partner inherits their deceased partner’s full inheritance tax allowance of £325,000.
This rule will also apply to the new RNRB allowance. By the 2020/2021 tax year, this will allow couples to leave up to a million pounds (including a property) to direct descendants (for example, their children) on the death of the second spouse/civil partner, free from Inheritance Tax.
Charlie and Lola have two children. Charlie dies in 2020 and leaves everything to his wife Lola. Because he left everything to his wife, he did not use his £325,000 inheritance tax allowance or his £175,000 RNRB allowance. Lola has her own £325,000 inheritance tax allowance and £175,000 RNRB allowance. The family home is worth £350,000 and Lola also has £650,000 of assets. Combining her own allowances and those she inherited from Charlie, Lola can leave everything to her two children free from inheritance tax.
The above strategy isn’t without some major concerns. If you
leave everything to your partner and they need care after their
death, the Local Authority will look at their full estate –
including what they inherited from you – when assessing their
ability to pay care fees.
Care across England and Wales is cheapest in the North West
where care fees cost typically £500 a week. The most expensive
region for care is the South East where weekly fees are £710 on
average. However, a clearer picture of the cost of care is
available when a typical 130 week (2.5 year) stay is compared to
the average house prices for the region. The following shows the
total cost of care as a percentage of the average house value:
Source: Royal London in the Telegraph
A huge portion of the family home’s worth can quickly be taken up by the cost of a typical care home stay. Whilst most people are happy
to accept that they need to fund their own care, it seems grossly unfair that they should also have to fund the cost of care for their
partner, at the expense of their children’s or grandchildren’s inheritance. So how can people take advantage of the RNRB without exposing their full assets to the risk of care fees?
A solution is to use your Will to leave property on trust to each
other for life, then to the children or grandchildren. On your
death, your spouse or civil partner will have a life interest in the
property/assets, after which it will pass on to whoever you choose.
If the surviving spouse or civil partner then needs care, the Local
Authority will not take the amount left in trust into account for
the purpose of care fees as it does not belong to your surviving
spouse or civil partner absolutely.
Does the RNRB apply in these circumstances? The Government has
confirmed that it does, as follows: “If a home is held in a trust
for a person’s benefit before their death, it’ll usually be included
in that person’s estate for IHT purposes if the trust gives the
person (the beneficiary) the right to use or occupy the property.
This right is often called an interest in possession.
This can happen when a person is given a right to live in the family
home following the death of their spouse or civil partner. The home
is held in a trust for the lifetime of the survivor (or life tenant)
and is included in their estate for IHT purposes. When the survivor
dies, their estate will be eligible for the RNRB if their direct
descendants then inherit their home.”
Source: Inheritance Tax: Residence Nil Rate Band, 8th Nov 2016,
The Government has also helpfully provided a case study of how this
works where a couple decide to use a trust in their Will, as
Mr H died in the tax year 2017 to 2018. He left a house valued at
£350,000 to his wife in a trust for her benefit whilst she’s alive.
His will directed that the house will go to their children on his
wife’s death. Mrs H dies in tax year 2020 to 2021. The house, then
worth £400,000, passes to the children when she dies. A claim is
made to transfer any unused RNRB from Mr H’s estate. RNRB for Mr H’s
estate is nil because he left the house to his wife. RNRB available
for transfer is 100% because none’s been used.
You work out the RNRB available on Mrs H’s estate as follows:
As the home passing to Mrs H’s children is worth more than the
maximum available RNRB of £350,000, Mrs H’s estate qualifies for the
full £350,000 RNRB.