L'amour dans l'air

With Valentine's Day on the horizon, what better time to talk about divorce, cohabitation and their implications for the new Inheritance Tax Residence Nil Rate Band (RNRB)?

For those unaware of the rule change; from April 2017 a new allowance (in addition to an individual's nil rate band of £325,000) will be phased in over 4 years that is conditional on the family home being passed down to direct descendants on death.

Starting at £100,000 in the 2017/18 tax year, it will rise to £175,000 by 2020/21 and benefit those with small to medium sized estates. The allowance tapers for estates greater than £2million and will not apply at all to estates above £2.2 million initially although this will be extended to £2.35 million by 2020/21 when the full allowance of £175,000 comes in.

The allowance remains available to those who end their lives in residential care or downsize later in life as long as the property would have qualified for RNRB, (had it been retained) any replacement property forms part of the estate and it passes to direct descendants on the owners death.

All in all it's a major benefit for the vast majority of home owners, but there's a potential rub. Many divorcees cohabit rather than remarry and use trusts to try to protect their children from their original marriage. However the nil rate band allowance is transferable to surviving spouse and civil partners, but not cohabitees.

In addition, the new allowance will also be lost if the property has been placed in a discretionary trust for the benefit of children or grandchildren. Therefore, not only may we see a sudden increase in enthusiasm for second marriages (as opposed to cohabitation), but also the undoing of some existing tax planning to maximise the benefit of the new allowance.

The new allowance will also make holding properties as tenants in common (rather than as joint tenants), even more important, particularly for those with larger estates so makes a review of Wills a sensible course of action.

Don't miss out on the full benefit of the new allowances and be sure to talk to us about them at your next review.

Robin Sainty APFS M.A. (Cantab)