View the related Tax Guidance about Residence nil rate band (RNRB)
Residence nil rate band ― main provisions
Residence nil rate band ― main provisionsWhat is the residence nil rate band (RNRB)?The RNRB is an addition to the basic nil rate band (NRB), which further reduces the inheritance tax payable on death. It differs from the basic NRB in that it is applied only to the death estate and not to lifetime gifts within seven years of death. Like the NRB, it is also available to an individual regardless of domicile. The enhanced allowance is dependent on:•the value of residential property in the estate, and•the inheritance of lineal descendantsThe RNRB was introduced in Finance Act 2015, with further refinements added by Finance Act 2016. It took effect from 6 April 2017. The detailed legislation is to be found in amendments to IHTA 1984. Much of the commentary on the provisions has focused on the complexity of the legislation which, to a large extent, is the result of the specific political target of the additional relief. The stated aim of the allowance was to make it easier to pass on the family home to children and grandchildren without the burden of inheritance tax. It follows a conservative election promise in April 2015 to “take the family home out of inheritance tax so you can pass something on to your children”. The RNRB is progressively withdrawn for individual estates valued at more than £2 million so the relief is aimed squarely at the moderately wealthy, who hold a large proportion of their wealth in their home, and
An introduction to inheritance tax (IHT)
An introduction to inheritance tax (IHT)This guidance note provides a background to IHT and the basic principles.Background to inheritance taxInheritance tax is, essentially, a tax on gifts. This typically arises when a person dies and all the property that they own (their ‘estate’) passes to beneficiaries. An individual may also transfer their assets to others during lifetime. This could be an outright gift of assets to another person or a gift into trust.Assets in trust are held by trustees for the benefit of others, whose entitlement to them is restricted in some way. Special inheritance tax rules apply to trusts to reflect the separation of legal and beneficial ownership.IHT is a tax on the donor ― the person who is transferring the asset(s). It is calculated with reference to their estate. It is not a tax on the beneficiaries, though what the beneficiaries receive may be reduced by the amount of tax. This position contrasts with the law in certain other jurisdictions where ‘death duties’, gift tax or the equivalent are a tax on the people receiving the property and is taxed in accordance with their status or wealth. Clients who receive an inheritance often ask if they have to pay tax on it. Generally, the answer is ‘no’, because any tax due has fallen on those administering the estate or trust, and will have already been paid. However, this may not always be the case, as a lifetime gift may give rise to IHT if the donor dies
Gifts with reservation ― land
Gifts with reservation ― landIntroductionQuestions concerning gifts with reservation (GWR) provisions are more likely to arise in connection with gifts of land than any other type of gift. A variety of factors contribute to this:•typically, land and buildings carry a high value and often comprise the major asset in an estate. Gifts of land, if effective for IHT, will result in a significant tax saving•although the land may be the most valuable asset in the estate, the property in question may be the donor’s home, or a second property which he is reluctant to give up entirely•often, there is an intention to keep land and buildings in the family when the owner dies, whereas other assets will be realised in cash. This makes it difficult to make a lifetime gift of the portion that is not needed•land and buildings which do not produce income, present an obvious candidate for disposal, enabling the donor to retain liquid investments•property, such as a house, cannot easily be divided up into separate physical units, but several parties can occupy it simultaneouslyFollowing on from the above, clients are often keen to pursue arrangements which will enable them to remove the value of land from their estate and at the same time continue to derive some benefit from it. As a result, the legislation contains specific provisions relating to land.Full considerationA gift of land is not a GWR if the donor pays full consideration in money or money’s worth for
IHT charge on death
IHT charge on deathThis guidance note outlines how to calculate the amount of inheritance tax that arises on death. It should be read in conjunction with the example calculations indicated in the text.The tax charge on death falls under two headings:•the ‘additional charge’ ― which arises on the chargeable lifetime transfers (CLT) and the potentially exempt transfers (PET) made in the seven years before death, and•the ‘estate charge’ ― which arises on the value of all the property the deceased owns (or is deemed to own) immediately before deathHMRC has produced an Online IHT checker to give an estimate of the IHT due. HMRC warns, however, that this does not calculate the IHT (it merely estimates) and is not a substitute for the required reporting procedures.The rates of IHTWhen a chargeable transfer is made, whether during lifetime or on death, part or all of it may fall within the nil rate band. Technically, a 0% rate of tax is applied to this portion, which is calculated using the cumulation principle. The cumulation principle determines the amount of nil rate band available to each transfer with reference to transfers in the previous seven years. See the Nil rate band guidance note. To the extent that the transfer exceeds the nil rate band, it is charged to tax at either the death rate or the lifetime rate. The primary rate at which IHT is charged on death is 40%, although there are provisions for a reduced rate of 36%
Family home ― co-ownership / co-occupation arrangements
Family home ― co-ownership / co-occupation arrangementsThe family home will often be the most valuable asset in a client’s estate and advisors are frequently asked if there are ways to mitigate inheritance tax (IHT) on the home while the client remains in residence.Various anti-avoidance measures make this difficult. The principal difficulties for IHT are the gifts with reservation of benefit (GWR) and pre-owned assets tax (POAT) rules, considered further below.Any dealings with the family home must also take account of capital gains tax (CGT) and the valuable principal private residence relief (PPR) in particular. Ideal planning will aim to preserve this as well as reducing the IHT burden, except in rare cases where the home is never likely to be disposed of.Non-tax issues are paramount and home owners considering a tax mitigation arrangement should be wary of any risk to their continued occupation of the property if this becomes reliant on the consent or co-operation of other family members. Therefore, any IHT planning involving the home should only be considered after alternative options for mitigating IHT have been explored.For example, the supplementary residence nil rate band (RNRB) is available for deaths after 6 April 2017 where the value of property is inherited by the homeowner’s descendants. When added to the ordinary nil rate band, this may wipe out any IHT charge on low-value estates and obviate the need for further lifetime IHT planning. See the Residence nil rate band guidance note.Various strategies for the home have been used in
Reduced rate of IHT for estates leaving gifts to charity
Reduced rate of IHT for estates leaving gifts to charityGifts to charity benefit from full exemption from inheritance tax. See the Exempt transfers for IHT guidance note. Where the disposition of a deceased estate includes a gift to charity, part or all of the remaining taxable estate will benefit from a reduced rate of inheritance tax, if the required conditions are met. The rate is reduced from 40% to 36% on the qualifying portion of the estate.This relief applies where the death occurs on or after 6 April 2012.Conditions for the reduced rateThe reduced rate applies to the non-exempt part of one or more components of the estate if gifts to charity make up 10% or more of a baseline amount of the components in question. The baseline amount is the value of the component, including the charitable gift, but after the deduction of liabilities, IHT reliefs, other exemptions, and the nil rate band.The mechanics of the valuation are described below. The estate is divided into components as follows:•the survivorship component•the settled property component•the general componentIHTA 1984, Sch 1A, para 3(1)The make up of each component is described below.The value of the assets passing to a charity or registered club from a particular component will be compared to the baseline amount of the component. If the 10% test for a component is passed, IHT will be charged on that particular component at 36%.If the assets passing to charity / registered clubs from one component of the
Residence nil rate band ― trusts, downsizing and lifetime gifts
Residence nil rate band ― trusts, downsizing and lifetime giftsFurther aspects of the residence nil rate band (RNRB)The RNRB is an addition to the basic nil rate band (NRB), which further reduces the inheritance tax payable on death. The principal provisions are described in the Residence nil rate band ― main provisions guidance note. This guidance note looks at some of the more advanced aspects.Settled propertyThere are limited circumstances in which property passing out of or into a trust qualifies for the RNRB.Where a person (D) has a qualifying interest in possession (QIIP) in settled property, it forms part of his estate on death. If the QIIP includes a residence, it will be eligible for the RNRB if it passes absolutely to a lineal descendant of D. The RNRB will not apply if it passes to a succeeding interest in possession. This is because the subsequent interest in possession will not be a QIIP so the beneficiary will not be ‘beneficially entitled’. However, it is thought that the RNRB would be available if the succeeding interest in possession is a disabled person’s interest (DPI) because that is a QIIP.See Example 1.In situations where property is passing from an absolute owner into trust, ie the property is settled by Will, the RNRB will be available if it is to be held in trust for a lineal descendant as beneficiary of:•an immediate post-death interest (IPDI)•DPI•a bereaved minor’s trust (BMT), or•an age 18–25 trustIHTA 1984, s 8J(3)–(4)It will
Will planning for assets qualifying for BPR
Will planning for assets qualifying for BPRThis guidance note considers how best to deal with assets which qualify for BPR on the death of the testator and the issues around Will planning for these assets to maximise the available relief. It considers the effect of leaving such assets by way of specific gift, maximising opportunities for planning with a spouse, the effect of assets qualifying for BPR on the availability of the residence nil rate band and the 36% rate. It also considers debts incurred acquiring, maintaining or enhancing assets qualifying for BPR before 6 April 2013 and the benefits of making a gift by Will rather than in lifetime. It highlights provisions in partnership and shareholders agreements that need to be considered to maximise relief, what to do to improve the BPR position before death, deathbed planning possibilities and what to do with assets where the BPR position is uncertain.For an overview of BPR, see the BPR overview guidance note.Will planning ― overviewAll clients should have a Will so that their estate is left as tax efficiently as possible to the people that they want to benefit after their death. Wills should be reviewed periodically and at certain life events such as marriage, divorce or the birth of children or grandchildren as well as when the size, nature or location of assets changes. For a general introduction to Wills, see the An introduction to Wills guidance note.Drafting Wills is not a reserved legal service (see the Reserved legal
Allocating the burden of IHT
Allocating the burden of IHTWho bears the tax?The basic premise of inheritance tax (IHT) is that it is a tax on a transfer of value calculated with reference to the transferor’s status. Tax on death is calculated as a total charge as if the deceased made a transfer of value of the whole of his estate. It is therefore a tax on the deceased but it is effectively borne by the beneficiaries of his estate: the value of their inheritance can be reduced by the tax on it. In a situation where the estate is distributed among a number of people, the question arises as to how to share the tax between them. This affects what they receive, and, in turn, what they receive may have an effect on the tax liability if they enjoy an exempt status.There is a distinction to be drawn between incidence of tax and liability. Incidence refers to who, ultimately, bears the burden of tax and the proportions in which it is shared out. Liability refers to who has a responsibility to pay the tax, the rules for which are set out in IHTA 1984, s 200.This guidance note is concerned with incidence and provides an overview of the issues to be considered in allocating the burden of tax to beneficiaries. It provides links to other guidance notes and examples which examine certain aspects in more detail.Allocation of the nil rate bandIn accordance with the cumulation principle, the nil rate band is applied chronologically.
IHT400 ― inheritance tax account
IHT400 ― inheritance tax accountPreparatory workBefore completing the Inheritance Tax account for submission to HMRC, the practitioner needs to undertake a comprehensive review of the extent of the estate and its proposed distribution. The work required leading up to the submission of the account is described in detail in the Obtaining the grant of representation guidance note and other notes in that sub-topic. The key elements of the initial investigatory work are:•understand the terms of the Will, or the intestacy provisions that apply and identify the beneficiaries (ie their relationship to the deceased) •identify the assets and liabilities that make up the chargeable estate on death. See the IHT charge on death guidance note •identify gifts made in the seven years before death, and gifts with reservation made at any time•obtain valuations of all the assets, liabilities and gifts mentioned above As the information and valuations are collected, it is advisable to record them on one working schedule such as an Excel spreadsheet. The Proforma ― estate at death working schedule provides a suitable template.In due course, the schedule can form the basis of the Estate Account at date of death as presented in the final Estate Accounts. As work progresses, values can be entered and amended; queries noted and resolved. The schedule can be constructed with a proforma inheritance tax calculation so that total values and the expected tax liability can be monitored. When you are satisfied that the valuation of the estate is
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.
Register for a free Tolley+™ Research trial to discover more tax research sources designed for you