"You must pay taxes. But there's no law that says you gotta leave a tip."
I couldn’t agree more.
In this blog, I’m going to show you how to shave £175,000 off your estate’s potential inheritance tax (IHT) bill.
If someone dies and their estate is worth more than the basic Inheritance Tax threshold, their estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due.
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.
The first £325,000 of any estate is not taxed.
This amount is called your nil rate band (NRB).
In April 2017, a new nil rate band came into effect, in addition to the existing £325,000 per person.
It’s called the residence nil rate band (RNRB), and it was phased in gradually over four tax years at a rate of £25,000 per annum until it reached £175,000 in tax year 2020/21.
This allowance applies where a family home is transferred to a direct descendant – a child for example.
A taper reduces the amount of the RNRB by £1 for every £2 that the net value of the estate is more than £2 million.
Background to RNRB
This measure was announced at Budget 2021.
As mentioned above, there are two nil-rate bands within IHT.
Any unused NRB or RNRB following the death of an individual can be transferred to their surviving spouse or civil partner.
This means most family homes in the UK will be passed down generations now, without any IHT liability.
Here’s how that breaks down for a married couple:
£325,000 husband’s NRB + £325,000 wife’s NRB + £175,000 husband’s RNRB + £175,000 wife’s RNRB
= an inheritance tax-free amount of £1m.
The current legislation requires the NRB, RNRB and threshold for the RNRB taper to increase in line with the Consumer Prices Index (CPI) in each year from 2021 to 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?
Senior international professionals risk making a number of expensive tax mistakes – and not planning for IHT is one.
Therefore, if your estate is made up of more than just one family home, seek professional advice and a solid IHT solution.