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TAX TIP TUESDAY: Inheritance Tax Reforms from April 2019

Our 5-minute read – Tax Tips – for UK doctors and dentists will help you save tax, get organised with your tax affairs and make sure you meet important deadlines with ease.

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. 

Inheritance Tax (IHT) has long been a bone of contention. There is some good news on the horizon – reforms mean a higher RNRB threshold this year. And there is more change to come.

For 2019/20 tax year, the IHT residence nil-rate tax band (RNRB) is increasing to £150,000. With the additional nil-rate band of £325,000, this means that a married couple can pass on £950,000 of inheritance to their heirs, tax free.

The RNRB is set to increase by a further £25,000 in April 2020 to £175,000, which could mean a tax free inheritance of £1million. The government plans to amend this threshold in line with the Consumer Price Index (CPI) from 2021.

What is RNRB?

Introduced in 2017/18, the residence nil-rate tax band is an additional exemption amount for an owned main home over and above the individual IHT nil-rate of £325,000 that is being inherited by a direct descendant. This does not affect the exemption of leaving assets to a spouse or civil partner. There are a few qualifying criteria for the person and their estate.

The additional threshold will be the lower of:

  • the value of the home, or share that direct descendants inherit
  • the maximum additional threshold available for the estate when the person died.

The residence threshold is applied to the whole taxable estate. However, if the home is worth less than the maximum allowance, you take advantage of the unused amount. It is possible to transfer this to a spouse or civil partner when they die and leave the home to their direct descendants.

Will we really benefit from RNRB threshold increases?

Receiving these exemptions may not be as easy as it sounds as HMRC aims to limit any loss of revenue to the Treasury – with the impact estimated to be a loss of £940million to revenue. And with plans to review and simplify tax regulations, this might impact the current design of having two thresholds for inheritance tax.

Although any nil-rate allowance will be transferable to a spouse, and it will also be in available if a person downsizes or no longer owns their home on or after 8th July 2015, the allowance will be tapered for estates with a net value of over £2million. The withdrawal rate will be 50%, or £1 for every £2 over this amount. It’s important to remember that allowances can only be passed to a spouse or civil partner, and not a child or other direct descendants.

The impact of new legislation

Initially this legislation will not affect spouses or civil partners, but it could be a benefit in the event of their death. It will possibly have a big positive impact on your children, grandchildren and adopted children when they are set to inherit your estate. The government believes that the new threshold could increase the demand for purchasing housing but that this won’t hugely affect house prices or rent levels.

If you are planning your family finances and want to work out the most tax efficient way to leave your estate to your loved one, contact us to talk about your options.

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