The new residence nil-rate band comes into force tomorrow and yet, according to research from Old Mutual Wealth (published in Professional Adviser magazine) the great majority of people know nothing about it.
The research, which was conducted last month by Atomik Research on behalf of Old Mutual Wealth, canvassed the opinions of 1,009 respondents living in the UK, aged 45 and above and with at least £50,000 in wealth and found almost three-quarters (70%) knew nothing about the residence nil-rate band.
From 6 April, the measure adds an additional £100,000 inheritance tax (IHT) allowance on to the current nil-rate band of £325,000. The residence nil-rate band is due to rise to £175,000 by 2020, which would mean by that point a couple could pass £1m to beneficiaries free of IHT.
“The basic principle of the new residence nil-rate band is that a family home can be passed on to ‘direct’ descendants ‘free’ of IHT,” says Old Mutual Wealth financial planning expert Rachael Griffin. “However, the rule is not that simple.”
She adds: “Even those who claim to have a good understanding of the residence nil-rate band failed to correctly answer some of our survey’s questions on the detail of the new legislation. The lack of understanding around the new rules could result in people not structuring their will or their financial affairs in the most effective way.”
According to Griffin, there are five principal points that even those who claimed to have a good understanding of the residence nil-rate band did not know.
1. You Can Select Which Property To Have The Allowance Against (45% Did Not Know)
The rule can apply to any one home included in the estate as long as it was lived in by the deceased at some stage before the death. “The home does not even have to be in the UK,” adds Griffin. “However, it does have to be within the scope of IHT and it must be included in a person’s estate.”
2. The Allowance Will Still Apply Even If The Property Is Sold (45% Did Not Know)
The government did not intend the residence nil-rate band to stop individuals from downsizing or selling their property, explains Griffin, adding: “So they added a rule that, broadly speaking, means the value of the estate made from downsizing or disposal of the property is eligible for the allowance.”
3. Any Outstanding Mortgage Is Deducted Before Applying The Allowance (40% Did Not Know)
The value of the home for residence nil-rate band purposes is the open market value of the property minus any liabilities secured on it such as a mortgage, says Griffin.
4. Property Must Be Left To Direct Descendants To Benefit From The Allowance (36% Did Not Know)
To make use of the new allowance the recipient must be a child, grandchild or other lineal descendant or a spouse or civil partner of a lineal descendant. “It is important to note that direct descendants do not include siblings, nieces and nephews or other relatives,” Griffin adds.
5. The Allowance Is Being Phased In (29% Did Not Know)
“The residence nil-rate band will eventually allow up to £175,000 of property wealth, per person, to be passed on with no IHT liability,” says Griffin. “It is being phased in, however, and in the 2017/18 tax year it will be £100,000.”