What Families Need To Know About the Residence Nil-Rate Band

April 2017 sees the introduction of a new Inheritance Tax (IHT) nil-rate band that is available in addition to an individual’s own nil-rate band of £325,000. It covers the main residence (or other qualifying property the deceased had lived in) when it is passed to descendants.

The new Residence Nil Rate Band (RNRB) will apply if you want to pass such property to a child or grandchild. It’s important to note that only direct descendants (including adopted, foster and step-children) can benefit, and that doesn’t include nieces and nephews for example. So not everyone will be able to rely on it for IHT planning purposes.

Gradual Implementation

The allowance is being introduced in stages over four years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT, which currently remains unchanged at £325,000.

How It Works

Once the changes are fully implemented, they will mean that each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. As the allowance can be passed from one partner to another on death, when the first partner dies their allowance can be transferred to the surviving partner, meaning that they will then have an allowance of £1 million. Where an estate is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.

Points To Note

Only one residential property will qualify for the relief, but it is possible to nominate which property is to qualify if there is more than one in the estate. Properties that the deceased has never lived in, such as buy-tolet properties, will not qualify.

Downsizing Provisions

The family home doesn’t need to be owned on death to qualify. This is a help to those who may have downsized or sold their property to move into care or to live with a relative. The RNRB will still be available, provided that the property disposed of was owned by the individual and would have qualified for the RNRB had the individual retained it, and provided that the replacement property or assets form part of the estate passed to the descendants.

To qualify, the downsizing or the disposal of the property must have taken place after 8 July 2015. There is no time limit on the period between the disposal and the date of death.

Reviewing Your Wills

It makes good sense to review the terms of your Will. The RNRB may be lost if the main residence is placed into a Discretionary Will Trust for the benefit of children or grandchildren. However, the rules surrounding the operation of the RNRB and the use of trusts is a complex area of law, and professional advice should be taken.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Not all Inheritance Tax Planning solutions are authorised and regulated by the Financial Conduct Authority.

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of investments can go down as well as up and you may not get back the full amount you invested.

The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

Simply Put

Alpha explained

Maybe it’s terminology you are familiar with, if not, here’s what Alpha means in the investment world – in a nutshell.

Alpha basically indicates to the investor whether the manager of a fund is doing his or her job successfully.

It tells you how the fund is performing relative to the benchmark it is aiming to beat. Alpha takes the volatility of a fund and compares its risk adjusted performance versus a benchmark. The return of the fund versus the benchmark will determine whether the fund and manager have either a positive or negative Alpha.

So, in practice, if a fund’s selected benchmark is the FTSE 100 and the index returned 7% over a defined period of time whilst the fund returned 10%, the fund will have a positive Alpha (this is a good thing).

If another fund returned 5% over the same period, that fund would have a negative Alpha versus the index (this is a bad thing).

When used as a longer term comparison versus the index, the Alpha will tell you the value that the active fund manager brings, compared with the benchmark he/she is aiming to outperform.