Inheritance tax explained by Interactive Investor expert
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Inheritance tax (IHT) has a range of thresholds and allowances to help ease the 40 percent tax burden on estates. The residence nil rate band threshold (RNRB) in particular was created to ensure family homes could be passed on through the generations, but some may no longer qualify.
The general threshold for IHT is £325,000, with everything in an estate above this amount being taxed at 40 percent.
However, a lesser known threshold is the RNRB which provides £175,000 tax free towards the value of a home left in one’s will.
If an estate and the deceased meet all of the qualifying conditions for RNRB, their total IHT relief will be £500,000, plus any other allowances or reliefs that may have been provided by their partner.
Additionally, the RNRB relief does not apply just to the value of the home but rather to the full estate if it qualifies.
In order for a property to qualify for the RNRB relief, it must be left to a direct descendant.
- Adopted children
- Fostered children
- Children of which the deceased was appointed as a guardian when they were under 18.
Unfortunately, the guidelines state that the home cannot qualify for the relief if it is passed onto nephews, nieces, siblings or other relatives.
Multiple descendants can inherit the home or share it, but if only one of the heirs is a direct descendant the relief will only be applicable on the value of their share.
Additionally, descendants must receive the home either through the will of the deceased, intestacy or other legal means in order to qualify.
Once a home has been inherited there are no restrictions on what the recipients can do with it, meaning they will receive the tax relief even if they decide to sell the home after receiving it.
If the home is worth less than the £175,000 maximum relief, the unused amount of relief can be transferred to a partner but cannot be used against the value of the rest of the estate.
Generally, the value of the home is measured up against the £175,000, and whichever value is lesser will then be tax-free.
For example, if a person has a home worth £100,000 and the rest of the estate is worth £400,000.
The RNRB will see the entirety of the property’s value going tax free, although for the remaining £400,000 only the basic IHT threshold will apply.
As the basic threshold is £325,000, this would see the estate paying tax on £75,000.
The home must be left to direct descendants in order to qualify for the tax relief.
Although, the unused RNRB relief of £75,000 can be transferred to their spouse or civil partner for them to use on their own estate when they pass.
If a person has multiple properties in their estate only one can qualify for RNRB and the executor can choose which one to use.
However the deceased must have lived in the property, properties that were owned but not lived in will not qualify.
The home also does not have to be in the UK.
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