When it comes to inheritance tax, timing can make a difference. Few people realise just the importance of timing, especially when a carefully timed “deathbed gift” could save tens of thousands of pounds in tax-free allowances.
Residence Nil Rate Band (RNRB)
This strategy relates to the Residence Nil Rate Band (RNRB), which is an inheritance tax relief that applies when an individual leaves their family home to their direct descendants. It allows for an additional £175,000 to pass tax-free, or £350,000 for a couple (Transferable Residence Nil Rate Band), on top of the standard nil rate band (£325,000).
However, the RNRB begins to taper once an estate exceeds £2 million; it is tapered away at a rate of £1 for every £2 over the threshold. Once your estate exceeds £2.35 million, or £2.7 million where a partner’s allowance has been transferred, the allowance disappears entirely. For high-net-worth individuals, this taper can significantly reduce valuable tax relief intended to protect the family home.
Sometimes, passing on assets can be difficult when an individual needs to continue using them or if an individual does not wish to pass them on until death.
Potentially Exempt Transfers (PETs) are a legitimate way to make gifts during an individual’s lifetime.
Potentially Exempt Transfers (PETs)
A PET is a gift made during someone’s lifetime and is exempt from inheritance tax if the donor survives for seven years. If an individual dies within that 7-year period, the gift is brought back into account for tax purposes. PETs are excluded when valuing the estate for the RNRB tapering rule.
This means that a gift made shortly before death will still reduce the value of the estate for the purposes of RNRB even if the donor does not survive the 7-year period. This is because the giving of the gift can reinstate the full £175,000 tax-free allowance (RNRB) or £350,000 (with the TNRB) with a potential inheritance tax saving of as much as £140,000 on larger estates over £2.7m.
As ever, expert advice is essential. Helen Hotten, tax and estate planning specialist with Howell Jones Solicitors: “This is one of the few occasions where acting at the last minute can still bring huge benefit to your estate planning. The tax saving can be substantial, but timing, advice and precision are everything, and the rules can easily trip up those who aren’t aware of the details.”
PET Example
An estate worth £2.2 million could lose £100,000 of the RNRB due to tapering.
But, for example, if a gift of £250,000 is made shortly before death, the value of the estate will drop below the £2 million threshold, meaning that the full RNRB allowance is available, which will save beneficiaries £40,000 in inheritance tax.
The expert added: “While it may sound surprising, the law allows this route because PETs are deliberately excluded from the RNRB tapering test. In effect, the estate is judged on its value at death, excluding recent gifts, so creating an opportunity for savvy planning at a sensitive moment.”
Other things to consider include:
- Capital Gains Tax (CGT): Gifting assets such as property or shares may trigger CGT, depending on the circumstances and the asset’s value.
- Impact on beneficiaries: The recipient of the gift may have tax or financial planning consequences of their own to consider.
- Record-keeping and disclosure: It is important to keep accurate records and to take timely professional advice to ensure the gift is treated correctly by HMRC.
The expert added: “For those with estates near or above the £2 million threshold, understanding how lifetime gifts interact with the RNRB can mean the difference between losing a valuable relief and passing on a larger legacy to the next generation.”
At Howell Jones, our Wills and Probate team have the knowledge and expertise to advise. Contact our Surrey solicitors today for expert advice and support.
