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By: Stuart Ritchie

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October 4th, 2017

How to save £175,000 of inheritance tax

Financial Planning

{Estimated reading time: 2 minutes, 34 seconds - read while you brush your teeth}

"You must pay taxes.  But there's no law that says you gotta leave a tip."[i] 

I couldn’t agree more – which is why I’m going to show you how to shave £175,000 off your estate’s potential inheritance tax (IHT) bill! 

Introducing the residence nil rate band 

If you’re British, or you have assets in Britain, your estate may be liable to 40% UK inheritance tax when you die.

A full explanation of this unfair tax can be found here, in an earlier article I wrote.

The first £325,000 of any estate is not  taxed.  This amount is called your nil rate band or NRB for short.

In April this year, a new nil rate band came into effect.

It’s in addition to the existing £325,000 per person.

It’s called the residence nil rate band, and it is being phased in until it reaches £175,000 per person by 2020.

If you have assets in Britain, your estate may be liable to UK inheritance tax

Adding up the savings

This new allowance applies where a family home is transferred to a direct descendant – a child for example.

With the additional allowance, the total nil rate band for qualifying couples will reach £1m by 2020.

Here’s how that breaks down for a married couple: -

£325,000 husband’s NRB + £325,000 wife’s NRB + £175,000 husband’s residence NRB + £175,000 wife’s residence NRB = an inheritance tax-free amount of £1m.

This means most family homes in the UK will be passed down generations now, without any IHT liability.

Family homes in the UK will be passed down generations now, without any IHT liability.

How the residence NRB will work in practice

The taxman says:

The residence nil rate band will be whichever is lower:

 Either 

The equity in the family home after deducting any outstanding mortgage,

Or 

The maximum amount of the band.

So, in 2020 when the maximum residence NRB will be £175,000, if a home only has £100,000 equity in it, the residence NRB will only be £100,000.

You’ll only be able to count the equity in one property if you own multiple homes.

And, a home has to have been a residence of the deceased – additional property assets like buy-to-lets won’t qualify for this relief.

Here’s how the residence NRB is being phased in: -

Year

Additional residence nil rate band

2017-18

£100,000

2018-19

£125,000

2019-20

£150,000

2020-21

£175,000

 

The plan is, it will then increase in line with the consumer price index from 2022.

Spouses, including civil partners, will inherit their deceased partner’s NRB and the new residence NRB too.

For larger estates (£2 million net value after liabilities/debts) the residence NRB will taper away at a rate of £1 for every £2 over this threshold.

So, if you have an estate worth over £2.35 million, no residence NRB would be available, and you should make alternative IHT planning arrangements.


Do you need to plan for IHT?

As I explained in an earlier article, British expats risk making a number of expensive tax mistakes – and not planning for IHT is one.

Yes, the residence NRB is good news – but it doesn’t negate your need to make a plan if you want to be sure your estate will pass as tax efficiently as possible to your chosen heirs.

Therefore, if your estate is made up of more than just one family home, seek
professional advice and a solid IHT solution.

Reference List: 

[i] Source: Morgan Stanley

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About Stuart Ritchie

Stuart Ritchie is a Chartered Financial Planner, Chartered Fellow, and Pension Transfer Specialist.

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