Financial & Legal News

It’s Always a Good Time to Look at Tax Planning

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When considering inheritance most of us look to leave our home to a loved one or family member and in the midst of Covid-19 there has been some good news for those planning to leave a legacy behind, says Pearson’s Financial Partner, Richard Eastwood.

Recently the residence nil-rate band (RNRB) has risen to £175,000, it’s a rise of £25,000 so now could actually be a good time to look at estate planning taking into account the new, larger allowance.

Many people I see are confused about RNRB, some presume their home just goes to family members of whomever they have selected in a Will, others believe the RNRB means main homes are entirely exempt from inheritance tax whatever their value.

So what is RNRB ?

There are two criteria that determine whether or not the RNRB applies:

  1. There needs to be a ‘Qualifying Residential Interest’ (QRI).
  2. Qualifying property must be ‘closely inherited’.

What is QRI? It essentially means the property must have been the deceased home at some time and so RNRB is only available to individuals or couples who have a QRI when they die, or who had one before. However, the property does not have to have been their main residence at the time they pass away, say for example if they were residing in a care home when they passed away.  Other property such as buy-to-let or holiday investment would not qualify, but a property that was once the deceased’s home and was later let to tenants could.

What’s ‘closely inherited’? ‘Closely inherited’ is inherited by a direct descendant for example:

  • The deceased’s children (which could include adopted, fostered or stepchildren) and grandchildren.
  • The spouses of those children or grandchildren.
  • The widows, widowers or surviving civil partners of those children or grandchildren if not remarried at the date of death of the property owner.

Many clients I see are aware of the nil-rate band for inheritance, but there is an important distinction between the RNRB and the £325,000 nil-rate band and it is that the RNRB only applies to homes owned when a person dies.

You may consider transferring your home to children as a lifetime gift, but the RNRB will not be available to offset against that transfer. However if you decide to leave your home to your children on death, the RNRB will be available.

I sometimes have a client who plans to settle their home into trust when they die. If it’s a discretionary trust, it is unlikely that the RNRB will be available in most instances, even if the potential beneficiaries are children or grandchildren.  In addition, the RNRB will not apply if the home is transferred into a discretionary trust during someone’s lifetime.

The RNRB also comes with a ‘tapering restriction’ and so in a married couple scenario in order to benefit from RNRB there will have to be advice once they receive the first spouse’s assets as the amount of RNRB available is reduced by £1 for every £2 by which the deceased’s net estate exceeds the ‘taper threshold’ of £2 million.

As always we would always advise chatting with one of our team free of charge and call 0161 785 3500 to speak to us.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

Written by Richard Eastwood


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