IN APRIL, THE RESIDENCE NIL RATE BAND (RNRB) comes into existence and this is a new tax relief that can reduce the amounts of Inheritance Tax (IHT) payable.
It is in addition to an individual’s existing nil rate band of £325,000 and is conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren).
The new allowance will be introduced gradually and means that by April 2020 families could pay no IHT on up to £1 million of their wealth. The RNRB will be phased in over four years in increments of £25,000 so will be £100,000 in 2017/2018, gradually increasing to £175,000 in 2020/2021. These are the maximum amounts, so the available allowance will be reduced if the value of the property is less than this.
As with the standard IHT nil rate band, the RNRB will be transferable between spouses and civil partners on death, so the unused percentage of the RNRB from the estate of the first to die can be claimed on the second death. This is irrespective of when the first death occurred or whether they owned a residential property at the time of their death.
Anyone with large estates of over £2 million will see the RNRB reduced by £1 for every £2 that the deceased’s estate exceeds £2 million. So on its introduction there will be no RNRB available if the deceased holds assets of more than £2.2 million. This will rise to assets of £2.35 million when the full allowance kicks in. Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.
The allowance is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death. If the family home passes into trust the RNRB may be lost where, for example, the property is placed into a Discretionary Will Trust for the benefit of the children or grandchildren. This is a little more complex and advice should be sought to check this allowance is not being lost inadvertently. The family home doesn’t need to be owned at death to qualify. This is to help those who may have downsized or sold their property to move into residential care.
Care is needed when planning estates as many people may hold the family home as joint tenants. On the first death this means the house passes to the surviving owner with no IHT because of the spouse exemption. The RNRB is not used on the first death, with the surviving spouse inheriting the full unused allowance. But if the combined estate on the second death is greater than £2 million, both RNRBs could be lost due to tapering. This may have been avoided by a change of ownership by keeping each partner’s assets below £2 million.
It makes sense to keep wills constantly under review to cater for changing circumstances – that also includes ensuring legislative change does not adversely impact upon what the deceased would have wanted.
Investing in property in 2017
Many people consider purchasing a second property to let as a good investment – there is no doubt that it has been very financially rewarding for many investors for a number of years now.
When asked if this is the best option for a lump sum investment, it is very difficult to compare a property purchase for letting with other types of investment such as investment ISAs as they are so very different in their nature that it is like comparing chalk with cheese. I often liken a purchase of a buy-tolet property to running a business as it can be as much of a lifestyle decision as an investment decision.
One consideration is that it usually involves a very significant cash investment. Some investors remortgage their own home to raise capital for a deposit for a second property and also raise a mortgage against this new rental property.
This can work well, but it is also a very risky strategy, as if the rental property is not let for a period of time or the tenant fails to pay the rent, you still need to pay the mortgage payments or one or possibly both properties could be repossessed by the lenders. This does also mean of course that the mortgage interest payments will reduce the return on your investment.
Additionally, under new legislation the mortgage interest can only be offset against the rental income for tax relief at basic rate and no higher rate relief will be available.
Another factor that has made this less appealing than it may have been historically is the stamp duty, which is the tax charged on purchase.
Recent changes mean that anyone purchasing a second property – whether it is for their own or for letting and investment purposes – will pay a Table 1 Property purchase price Rate of Stamp Duty Additional property rate £0-£125,000 0% 3% £125,001-£250,000 2% 5% £250,001-£925,000 5% 8% £925,001-£1.5 million 10% 13% higher amount of stamp duty than on the purchase of your only property. These rates are now as shown in Table 1.
You can see that this makes it less attractive – a property of £250,000 would now involve £10,000 stamp duty as opposed to £2,500 before the changes. This can have a significant impact on potential returns.
There are several other considerations when investing in real property to let: the costs of purchase and sale as outlined above are so high, it makes it inappropriate for shorter terms, so it needs to be considered an extremely long-term investment.
Furthermore, property needs managing, which can be expensive and time-consuming, and is why I feel that this needs to be a lifestyle decision – it may of course be something you enjoy, but may also become a chore for some!
