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Sarah Pull, Senior associate, Private Client Group, SAS Daniels LLP

Sarah Pull, Senior associate, Private Client Group, SAS Daniels LLP - Credit: Archant

How downsizing can affect inheritance tax

Sarah Pull, senior associate, Private Client Group, SAS Daniels LLP,

A stamp duty holiday was introduced earlier this year to offset the impacts of the pandemic on the UK housing market. Could the introduction of the stamp duty holiday and rise in house moves have future implications with regards to inheritance tax claims related to downsizing?

In 2017, the government introduced the residence nil rate band (RNRB), which provides an additional nil-rate allowance for inheritance tax. It was introduced in a bid to meet its pledge of a £1million inheritance tax threshold and has stood at £175,000 since 5th April 2020. These figures apply per person and, when used in combination with the existing £325,000 nil rate band threshold, a married couple could benefit from a potential combined allowance of £1million.

However, this additional allowance only applies to those who have owned their home and have direct descendants to whom they would wish to leave their interest. Direct descendants include children, stepchildren or grandchildren, but exclude nieces and nephews, or family friends. Your estate may also benefit from a deceased spouse’s RNRB even if they had passed away before its introduction. Where an individual’s estate is worth more than £2million the benefit of this additional allowance is reduced proportionately.

Additional rules were also introduced to allow the reduction in inheritance tax to still be available if a property owner sold their property and either downsized their home or moved into alternative accommodation after July 2015. This is known as the downsizing addition and the rules for how it’s applied are complex. With an increase in house moves at this point in time, will this have a knock-on effect of more applications for the downsizing addition being needed in the future?

Despite the RNRB being in place for a few years, people are often unaware of its existence. There are complex criteria to be met and it is important to review your will to ensure that full benefit will be made of this allowance where possible, especially if you have incorporated trusts into your will, for minor beneficiaries or for inheritance tax planning.

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From Louise Eccleston, head of Private Client, Storrar Cowdry,

The RNRB is a really useful additional allowance for clients who can satisfy all the criteria. It does, however, penalise those without children or families wanting to use a trust structure to protect their assets, eg to protect the beneficiary from outsiders helping them spend their inheritance. There is still a place for trusts but a well-drafted will should carve out the RNRB element first.

From Andrew Evans, partner, Wills and Trusts, Ward Hadaway,

The RNRB has proved to be an overly complicated relief that does not sit comfortably with families who are concerned about beneficiaries inheriting too much too soon. With guidance from a specialist solicitor, it is possible to protect the house for young children while at the same time capturing the inheritance tax relief.

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