Inheritance tax - leaving a home to children / stepchildren / grandchildren

Are you planning on leaving your home to your children or grandchildren? Beware the potential impact of inheritance tax. Page Kirk tax partner Neil Moon explains how careful planning can help you mitigate tax liabilities and maximize the benefits of Residence Nil Rate Band. Whether you're in the early stages of planning or are already navigating the process, this article provides valuable insights.

For most people their home is their most valuable asset. According to data from Land Registry, average house prices in Nottingham have risen by more than 70% in the last 7 years. Inheritance Tax is applied on certain transfers of wealth during lifetime, but more commonly on death estates. Careful planning can help mitigate these tax liabilities, and there are reliefs and exemptions available to be made use of, particularly favouring spouses/civil partners and those with business assets. In this article we will consider the Residence Nil Rate Band.

The 2015 Conservative Manifesto said the Government would take the family home out of tax for all but the richest by increasing the IHT threshold for married couples/civil partners.

The RNRB was introduced which is now worth £175,000 per person (£350,000 for couples who are married or in a civil partnership). Together with the NRB of £325,000 per person, married couples and civil partners could have an estate worth up to £1m without having a liability to IHT.

Which estates are entitled to the RNRB?

The RNRB is available where:

• The estate contains an interest in a residential dwelling which had at some point during the deceased's life been their main home.

• The residence is left either via the Will or intestacy to a lineal descendant, i.e., children, stepchildren, adopted children, foster children.

The RNRB is limited to one property per estate. If the deceased occupied more than one property as a home, the Executors will need to nominate which one should qualify.

A property that was the deceased's home at some point during their period of ownership, no matter how short a time, will qualify.

The RNRB is only applicable on death estates and is not available on lifetime transfers of a residence.

The amount available is the lower of the value of the deceased's share in a residence and £175,000.

Estates exceeding £2m in value are eligible for the RNRB but the amount of relief is reduced by £1 for every £2 in value exceeding £2m, such that estates exceeding £2.35m will not be eligible at all.

Transferring the balance to spouse/civil partner

The proportion of any unused RNRB can be transferred to a surviving spouse/civil partner.

The RNRB might not have been fully used because, for example, the first spouse did not have a qualifying interest in a residential dwelling, or they did but they did not leave it in their will to direct descendants, or the value of the residence left was less than the RNRB.

Is the RNRB available if the home is left in tust?

The RNRB is available in certain situations if it is left in trust including, for example, where the property is left via a Will trust, provided the beneficiary is entitled to use. This is referred to as an Immediate Post-Death Trust or Interest in Possession trust.

For example, Mr Clough dies and leaves his share in a property he occupied as his home to his children in trust with a life interest in favour of his wife (not the mother of his children). This type of arrangement might exist between couples in second marriages, where each wants to leave their share in the home for their children but allow the surviving spouse to live in the home for rest of their lifetime.

Registering the Immediate Post-Death Trust with HMRC

This is a non-taxable trust that will not need to be registered with HMRC provided the beneficial owners i.e. the children in the above example, are also named trustees.

If, on the other hand, say the wife and the tax adviser were the trustees but the children were not, there is a miss-match between the beneficiaries and the trustees, and the trust must therefore be registered on HMRCs trust register via the TRS (trust registration service).

If you would like more information and advice about the topics discussed in this article, please contact our tax team on 0115 955 5500 or email enquiries@pagekirk.co.uk.

Find out more about our inheritance tax planning service.