Easing your inheritance tax liability

As farming families frequently rely on the natural succession of the farm, where ownership is passed down through the generations, every care must be taken to avoid a hefty inheritance tax bill.

The first step is, of course, to ensure that you have a valid and up-to-date Will to ensure that the legal ownership of the land and business assets used in running the farm pass to your chosen relatives or other beneficiaries. In addition, your Will should be drafted smartly to ensure that it makes use of every available opportunity to ease inheritance tax liability – particularly with regard to the use of agricultural and/or business property reliefs. Another such measure that was only introduced in 2015 is the residence nil-rate band.

Laura Carter, specialist agricultural Wills & Probate Solicitor at Pearsons & Ward Solicitors in Malton, explains how the residence nil-rate band applies.

Currently, each individual has a standard nil-rate band allowance which allows you to pass on £325,000 worth of assets on your death without incurring inheritance tax. The residence nil-rate band allows for an additional tax-free allowance where you leave a residence to a direct descendant such as:

• a child, grandchild or other lineal descendant;
• a husband, wife or civil partner of a lineal descendant including their widow, widower or surviving civil partner;
• a child who is, or was at any time, your stepchild;
• your adopted child; or
• a child who was fostered at any time by you.

Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the above list.

The additional threshold before inheritance tax becomes due on an estate is £150,000 for the 2019/20 tax year. It will rise to £175,000 in the 2020/21 tax year and then increase in line with the Consumer Price Index from 2021/22 onwards. In 2019/20 if you qualify, your total inheritance tax nil-rate band threshold will be £475,000.

The residence nil-rate band is limited to one residential property and you have to have lived in the property before you die; buy-to-let properties therefore do not qualify. Personal representatives can, however, nominate which residential property should qualify if there is more than one in the estate.

One of the benefits of the residence nil-rate band is that the family home does not need to be owned at death for it to be applicable. So, even if you have downsized or sold your property, perhaps, to move into residential care, the residence nil-rate band will still be available as long as the property would have qualified for the additional threshold had you retained it and the replacement property and/or assets form part of the estate and pass to the above qualifying descendants.

If your estate is worth more than £2million then the relief is tapered (i.e. withdrawn gradually).

Just like the regular nil-rate band, the residence nil-rate band can be transferred between spouses and civil partners - the unused percentage of the residence nil-rate band from the estate on the first death can therefore be claimed on the second death (subject to any tapering).

Before you make your Will and finalise your estate planning, you are strongly advised to seek expert legal advice as the residence nil-rate band can easily be lost. If, for example, you place your property into a discretionary trust for the benefit of your children or grandchildren, you risk losing the additional allowance however it would still apply if you set up a trust which grants your children or grandchildren an absolute interest or interest in possession in the property.

For more information on the residence nil-rate band allowance, or any other estate planning enquiries, please contact Laura Carter on 01653 692247 or email laura.carter@pearslaw.co.uk to see how we can assist.