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TAX TIP TUESDAY: IHT: Residence nil rate band – are you using yours?

Our five minute read, Tax Tips for UK doctors and dentists will help you save tax, get you organised with your tax affairs and make you feel at ease that everything is taken care of.


This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. The Financial Conduct Authority does not regulate tax advice. 


IHT: Residence nil rate band – are you using yours?

The Residence nil rate band (RNRB) is an additional allowance for residences beyond an individual’s Inheritance Tax threshold.

The 2017-2018 and the 2018-2019 IHT allowance currently sits at £325,000, but with the newly introduced Residence nil rate band, doctors and dentists can now increase the amount of their estate that will fall under the tax threshold.

This means that by the year 2020, the tax-free allowance for homeowners with children will be £500,000 for an individual and £1 million for a married couple or civil partners.

This table shows you what the RNRB allowance will be from the 2017/18 tax year.

Tax Year                               Amount
2017/18                                    £100,000
2018/19                                    £125,000
2019/20                                    £150,000
2020/21                                    £175,000

After 2020/21, the amount will increase consistently with inflation according to the Consumer Price Index.


How do you qualify?

There are certain requirements for the RNRB to be available. First and foremost, a person must own a residence, which is categorised as a place in which the deceased lived with some degree of continuity.

Secondly, the deceased must leave an interest in a residence in their will (or on an intestacy) to one or more of their lineal descendants, or spouse. In this case, ‘child’ may refer to step-child, adopted child, or foster child.


Maximise your estate

It is important to note that the RNRB is transferable to a surviving spouse. To augment the amount of RNRB after the passing of both yourself and partner, an option would be to delay leaving children an interest in the family home until after the death of the second parent.

Example:

Dr. Harris owns his home jointly with his wife. In the 2017/18 tax year, their home is worth £250,000 and £350,000 in 2020/21. They also each have an estate worth £325,000.

Upon his passing in 2017/18, instead of passing his 50% interest in their home to their child, Dr. Harris leaves it to his wife, leaving 100% of his RNRB available. Therefore, upon Jane’s death she is entitled to her own RNRB of £175,000 as well as her husband’s £175,000 totaling £350,000.

By leaving his 50% interest to his wife instead of his daughter, an extra IHT free amount of £75,000 has been made available.


Additional Considerations

Something to keep in mind is that the RNRB is set against the deceased’s total estate, not just the residence, so if a child inherits a residence subject to IHT, they could be responsible for an IHT bill. Also you should be aware that for those with estates over £2 million – for every £2 over this threshold, the allowance reduces by £1.

If you would like help with your inheritance tax planning, contact Dental and Medical Financial Services today.


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