IHT: Beware the Claw(back)…
After my last blog I’ve had a few people reach out to me about the potential clawback that can occur with the Main Residence Nil Rate Band, and as it’s a bit confusing I thought it might be worth explaining further. Most people have by now heard of it, some even carry the misconception that the first £1million pound of a joint estate is IHT exempt. Well, it’s far from that simple and can lead to problems if not properly planned for…
The Main Residence Nil Rate Band is tapered by £1 for every £2 that the net value exceeds £2million. The £2million is calculated using the value of the estate before reliefs such as Business Property and Agricultural Property Relief. The effect of this means that, for example, shareholders of unquoted trading companies may find that they do not qualify for the Main Residence Nil Rate Band if the shareholding is valuable, even if the shares themselves are not subject to IHT!
The relief is restricted where the total net value of an individual’s IHT estate, after deduction of liabilities but before deducting any reliefs and exemptions, is more than £2million.
The threshold means that no additional relief will be available for an unmarried individual’s estate that exceeds £2.35million in 2020/21.
For the second death in qualifying married couples and civil partnerships, the upper limits will be £2.7m in 2020/21 (i.e. the £700,000 over £2m will reduce the Main Residence Nil Rate Band by £350,000, cancelling out the 2 x £175,000 residence Main Residence Nil Rate Band’s).
Even if you can get your head around the numbers, you need to make sure you’re current Wills and estate planning are up to task. Many with “care fees planning” trusts could find themselves not qualifying. Those with Wills that don’t specify the property passes to a lineal descendant could well be in the same predicament. If you’re in any doubt I’d recommend a review today!