Let’s start off with something fun! This crazy world of wills can be confusing and overwhelming for many people, so here are some jargon busters to get you going.
Beneficiary: Someone who benefits from what you leave in your will. IHT: Inheritance tax. Currently 40% in the UK. NRB: Nil rate band. Currently £325,000. This is the amount anyone can leave without it being taxed. Any amount over this is taxed at 40%. RNRB: Residence Nil Rate Band, the amount you can leave tax free to a qualifying beneficiary. Currently up to £175,000 of a main residence.
Inheritance tax (IHT) is the charge that the government makes to every person’s wealth after they have died. We are allowed to leave some money that doesn’t get taxed and this amount of wealth is called the Nil Rate Band or NRB for short. Today that NRB amount is £325,000.
We can leave that amount to anyone, whether they are friends, family or otherwise. The amount is a combined total, so unlike the Republic of Ireland (where each beneficiary class may get their own NRB before getting taxed), we only get a single NRB to share between all beneficiaries.
Any amount over the £325,000 can be taxed an eye watering 40%.
On 6th April 2017, the government responded to calls of raising the NRB as a lot of people had homes which were over that threshold, meaning their normal wealth was being unfairly taxed. The government created a new threshold called a Residence Nil rate Band (RNRB). This is quite a complex area and is not always easy to understand, but in very basic terms, assuming you are not already a multi-millionaire on death, then you can leave upto £175,000 of equity in your home to qualifying beneficiaries, tax free. Generally speaking, this would be a direct lineal descendant. Typically this will mean your children, grandchildren and great grandchildren as well as step-children, adopted, fostered and those who you were appointed guardian whilst they were under 18 years.
As an example, if you had £425k in the bank on your death and a home which after the mortgage was settled, was worth £75k (Combined total £500k), then you could use up £325k of the NRB on the bank asset and only £75k of the RNRB on the main family home, so long as you left it to one of the above beneficiaries. That would mean that the remaining £100k would be taxed at 40%.
If instead, you had £325k in the bank and equity in your home of £175k (combined total still £500k), you could use the full NRB and RNRB and pay zero tax, even though the value of the estate is the same.
To read more about trusts and its benefits, take a look at this other article I wrote. The rules are complicated and often cause confusion, so we always recommend speaking to a professional if you are unsure. I’m always happy to help! Feel free to email me at email@example.com.
James Pearson - Estate Planning Director - JPEP