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Money & Rights

How new IHT rule can help you

Michele Todd on how you can benefit from new Inheritance Tax Allowances

It is important to review you Will regularly so you can maximise benefits brought by changes to inheritance law. An example is the new Residence Nil Rate Bans (RNRB) allowance, which gives extra tax relief to those with an estate, including a main residence, worth more tahn £325,000- which is the Inheritance Tax (IHT) threshold (or nil rate band).

Additional nil rate bands when a residence is passed on death to a direct descendant began their phased introduction on April 6- and will increase by £25,000 a year util 2020.

The changes make some family homes exempt from IHT and bring a number of new conditions for succession.

Qualifying beneficiaries

Property must pass to a direct descendant of the owner. these are a child, grandchild or other lineal descendant and a lineage descendant's spouse or civil partner (including their widow, widower or surviving civil partner). Also entitled are a stepchild (someone whose parent is, or was, the spouse or civil partner of the will maker), an adopted child, a child who was fostered at any time and a child for whom th owner is the appointed guardian or special guardian when they're under 18.

It cannot go to nieces and nephews or siblings but may be left to a mixture of direct and non-direct descendants- with its value for RNRB purposes calculated on the share that direct descendants inherit.

Property left in certain types of trusts qualifies for RNRB:

1) An Immediate Post Death Interest (IPDI), where the beneficiary can gain income from the property or live in it (known as an Interest in Possession (IIP).

2) A Disabled Person's Interest (DPI), where the person had an IIP.

3) An 18 to 25 trust.

4) A trust for bereaved minors (TBM): here, beneficiaries mist be entitles to property for IHT purposes.

5) Life Interest Trusts. Where the beneficiaries are direct descendants, the estate will be entitles to RNRB on the survivor's death.

Unused RNRB can be transferred from one spouse to the other, even if the first dies before April 6 2017.

Those not entitled

Discretionary trusts generally don't qualify for RNRB, but there are exceptions for disabled beneficiaries and those under 25, which legal or financial adviser can provide guidance on. Anyone thinking of establishing trusts for loved ones should always take proper legal advice to ensure they do not block RNRB- while existing trusts should be reviewed regularly to ensure they comply with changing rules.

In addition, people who do not have lineal descendants and those who have never owned a property cannot make RNRB provisions.

For estates of more than £2m, RNRB is withdrawn by £1 for every £2 they are above the threshold- even when left to lineal descendants. This may well increase with inflation in future years.

Qualifying properties

To claim RNRB, the Will maker must have a property they have lived in as their main residence at some time. Buy-to-let properties don't count. If the owner makes a gift of he property, it may still count as an eligible residential interest because it will usually be liable to IHT.

Downsizing

A Will maker can protect the RNRB if they sell their family home and move into a smaller property or nursing home. This is known as downsizing addition and is subject to these conditions:

1) the deceased sold a former home and either downsized to a less valuable one, or ceased to be a homeowner, on or after July 8 2015.

2) The former home would have qualified for the additional threshold if it had been kept until death.

3) Some of the estate is inherited by the deceased's direct descendants.

The amount of the down sizing addition will generally be equal to the 'lost' RNRB that could have been applied if the individual had died when they owned the more valuable property. It will also depend on the value of the estate's other assets that are left to direct descendants.

Changing a Will's terms to benefit

A deed of variation allows beneficiaries to rearrange their entitlement to an estate to maximise RNRB or other advantages, effectively changing a person's Will after death. It is known as varying the estate, and means anyone receiving an inheritance can redirect it to someone else- even those not named in he Will.

People should be wary of relying on a deed of variation for an RNRB claim, though. they are being reviewed by the government and it cannot be assumed they will still be in force when today's Will makers die.

Keeping up with the regulations on tax-efficient inheritance is a complex task- while altered circumstances might also require changes to your bequests.

Want to find out more?

Contact Michelle Todd, tel: 0114 290 6207, email micheletodd@hlwkeeblehawson.co.uk

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