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The Inheritance Tax residence nil rate band – are you sure you qualify?

From 6 April 2017, the standard inheritance tax nil rate band, which is currently £325,000, was enhanced by an additional “residence nil rate band” (RNRB). This was designed to be fulfilment of the Conservative party’s promise to increase the inheritance tax nil rate band to £500,000 per individual or £1 million per couple.


The RNRB is available where residential property is left to direct descendants. For these purposes a direct descendant means a child, or a remoter lineal descendant such as a grandchild or a great grandchild. It is also interesting to note that the definition of “child” for the purposes of the RNRB includes stepchildren and foster children.


The RNRB has some interesting wrinkles. Here are just a few of them:


  • The home does not have to have been the deceased’s main residence or to have been lived in for a minimum period. It can be any property which the deceased occupied at some stage prior to death so long as it included in the death estate.
  • If the deceased person owned two or more homes, the personal representatives can nominate which one should qualify for the RNRB.
  • The home does not have to be situated in the UK although it must be within the scope of UK inheritance tax and included in the deceased’s estate.
  • The home does not have to actually end up in the hands of the direct descendants. The RNRB will still be available if the personal representatives sell the property as part of the administration of the estate and only pass the sale proceeds onto the direct descendants.


So far so good. Unfortunately, the RNRB legislation has a very nasty sting in the tail.


It has a “taper threshold” of £2 million.


If the value of a person’s estate at the date of death exceeds £2 million, the available RNRB is reduced by £1 for every £2 of the excess. So, if the value of an estate exceeds £2,350,000 there is no RNRB available at all.


The nasty sting applies to the calculation of the taper threshold. The £2 million is calculated before taking into account any exemptions or reliefs whatsoever. This includes Business Relief and Agricultural Relief.


What this means is that an individual who owns a business, whether it’s a company, partnership or a sole tradership, or who owns agricultural property may believe that they will qualify for the RNRB and may have factored it into their estate planning when in fact no relief is available at all.


At Friend Partnership we recommend that you re-examine the availability of the RNRB. This may prompt you to revisit or accelerate succession planning and lifetime giving for maximum inheritance tax efficiency.


Friend Partnership are inheritance tax and estate planning specialists. If you have any concerns or if you need professional advice, contact David Gillies by email at david.gillies@friendllp.com or by phone on 0121 633 2000.

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The UK's tax system for individuals classed as "not UK domiciled" (often called "non-doms") is undergoing a significant overhaul. This system has traditionally offered tax advantages for foreign income and gains, but those benefits are coming to an end. Non-domiciled individuals are generally those who haven't established strong ties to the UK in terms of residence or family connections. Previously, they enjoyed a tax perk known as the "remittance basis of taxation." This allowed them to avoid paying UK income tax on foreign income and capital gains, as long as the money remained outside the UK. However, these advantages have been gradually restricted in recent years. The new reforms, announced by the Chancellor of the Exchequer – Jeremy Hunt, represent a change to the existing non-dom tax system. The New System - What Does it Mean Non-Doms in the Future? Starting April 6th, 2025, a new system will be in effect. Here's what it entails for non-domiciled individuals who become UK resident after that date: Temporary Tax Exemption: If you haven't been a UK resident in the past 10 years and become one after the reform, you'll benefit from a temporary tax exemption. This means your foreign income and gains will be exempt from UK income tax for the first four years of your UK residency. Standard Taxation After Four Years: After the initial four-year grace period, your foreign income and gains will be taxed on the same basis as other UK residents. To avoid double taxation, relief will be available against UK tax under Double Tax treaties or the Unilateral system for any foreign tax already paid. What about Existing Non-Doms? The government acknowledges the complexities of transition for current non-dom who are UK residents. Transitional rules are being considered to ease the shift. These may include: Reduced Tax Rate for Bringing Foreign Income to UK: Existing non-doms might be offered an opportunity to bring previously untaxed foreign income and gains back to the UK at a reduced tax rate. Rebasing Foreign Assets for Capital Gains: There's also a possibility of "rebasing" the value of non-domiciled individuals' foreign assets for capital gains tax purposes. This could mean using the asset value in 2019 as a baseline, potentially reducing their future capital gains tax liability. Uncertainties and Taking Action The details of the new system and the transitional rules are still under development. The full picture will become clearer when the government publishes further consultations later in the year. Given the complexities involved, it's crucial for individuals who might be affected by these reforms to seek professional tax advice. Understanding the opportunities and potential pitfalls of the new system can help you make informed decisions about your financial future. While the non-dom tax reform simplifies matters to a certain extent, it introduces new considerations for individuals with international finances. Staying informed and seeking professional guidance will be key to navigating these changes effectively.

Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK

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