Inheritance tax warning over ‘traps’ with residence nil rate band rule
Inheritance tax: Graham Southorn explains how trusts can help
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
The tax applies at a 40 percent rate on any total assets that a person inherits worth more than £325,000, or worth £650,000 if inherited from a couple. However, there is an additional ‘residence nil rate band’ (RNRB) of £175,000, for when a home is being inherited, which increases an individual’s nil rate band to £500,000 for their estate, or £1million for a couple.
A man called Jonathan wrote in to The Telegraph to ask lawyer and contributor Gary Rycroft about his mum’s situation, in hopes his family could avoid the tax altogether.
His mum, who is still alive, had an estate worth around £900,000, including a house worth £300,000.
He wanted to clarify if her nil rate band was £1million and if this means her estate would avoid the tax altogether.
In his response, Mr Rycroft warned of several “nuances” which can be “traps for the unwary” when it comes to the RNRB.
He warned that the rate only applies when a residence is left to a direct descendant, although stepchildren do qualify as direct descendants.
He also said that in the case of Jonathan’s mum, who wanted a third of the value of the house to go to her grandchildren when they turn 25, there is another issue.
The legal expert said in this case a trust would automatically be created under the terms of her will, meaning that share of the house would not go to the grandchildren directly.
This means the RNRB would not apply to the funds, taking away another £100,000 from the IHT allowances.
This would mean £150,000 of her estate would be liable for the 40 percent tax, landing the family with a £60,000 tax bill.
However, Mr Rycroft said this could be “easily” avoided by restructuring her will to leave all the house to her son, and a cash gift worth a third of the property to her children at age 25.
Giving gifts are a good way to reduce a person’s inheritance tax liability by reducing the size of their estate.
An individual can give away up to £3,000 each year, split between any number of people, or give away any number of gifts worth £250, to different people.
There is also the option to give money away when a person gets married or enters a civil partnership.
A person can give away up to £5,000 to a child, £2,500 to grandchild or great-grandchild or £1,000 to anyone else.
People can also give away a larger amount and still avoid the tax, as long as they survive for seven years after the gift is given.
In this case, the tax rate for the gift reduces from 40 percent as the years progress towards the seven-year anniversary from when the gift was given.
Gifts to charities are also exempt from the tax, and a person can reduce their inheritance tax rate to 36 percent if they leave 10 percent or more of their estate to charity.
The 36 percent rate will apply to the rest of the estate once the portion going to the charity has been deducted.
Assets such as cash or savings will be part of a person’s estate for inheritance tax purposes, even if they were originally part of their pension pot.
In most cases, any pensions people have can be passed outside of their state and so won’t be subject to inheritance tax.
Source: Read Full Article