Reduce Your Inheritance Tax Bill Whilst Living in Spain

By Barry Davys - Topics: Barcelona, Estate Planning, Inheritance Tax, Succession Planning, United Kingdom

A Guide to the Residence Nil Rate Band

Good news! From 6th April 2017 there is a new, bigger Nil rate band of inheritance tax. This new band was called the Residence Nil Rate Band (RNRB) but now is also known at the HMRC as the “Additional Threshold” (AT). If the change of name isn’t enough to cause confusion, how it actually works is not as straightforward as one might expect.

A recent survey by Old Mutual showed that 70% of people did not know about the new RNRB. Of those that did know;

  • 45% of people did not know that you can nominate which property you can nominate for the AT
  • 45% of people did not know that you can still claim the AT even if the property has been sold
  • 40% did not realise that the mortgage can be deducted before applying the AT
  • 36% did not realise that the property has to be left to a direct descendant to be eligible for the AT
  • 29% did not realise that the AT will increase up to the UK tax year 2020 – 20021

Living in Spain

For those of us from the UK, and for those people you know who are from the UK, it is possible to claim this Additional Threshold even though we are living in Spain. This is important as we will still most likely to be assessed for UK Inheritance Tax even if we have lived here for 50 + years.

Guide to the Residence Nil Rate Band (RNRB)
The starting point is: will this additional threshold apply to us if we now live in Spain? As this is a fundamental question, I wrote to the HMRC and they responded with the following:

The new residence nil-rate band will apply if the qualifying conditions are met irrespective of where the residence is located. There is no requirement that the residential property has to be in the UK but the property does have to be within the scope of UK inheritance tax (IHT) and be included in the deceased’s estate. If a UK domiciled individual (including one which is deemed UK domiciled) leaves their residence outside the UK to a direct descendant and meets the other qualifying conditions, their estate would be entitled to the residence nil-rate band.

We will be eligible even though we live in Spain for the RNRB!

Here is a guide to the rules for eligibility for the AT.

  • The RNRB is in addition to the normal Nil Rate Band. It is indeed an additional Threshold
  • You have to have lived in the property that you are claiming the allowance against
  • You can pass on this allowance to your spouse in the same way that you can pass on the regular Nil Rate Band
  • The value of the property has to be passed to direct descendants

The AT is:

  • £100,000 per person in the UK tax year 2017 -2018
  • In 2018 – 2019 it will be £125,000 per person
  • In 2019 – 2020 it will be £150,000 per person
  • In 2020 – 2021 it will be £175,000 per person

The AT is tapered away to zero for estates over £2 Million at a rate of 1 for every 2 over the £2 Million. Please note this reduction applies based upon the value of your estate NOT on the value of your property. Eg, an estate of 2,100,000 is 100,000 over the limit and so the additional threshold will be reduced by 50,000 in this case.

The RNRB is not given automatically. Your heir will need to claim it. Previously, the IHT 400 was used to decide upon your Inheritance Tax position. However, to claim the RNRB a form IHT 435 will ALSO have to be submitted. This is significant and one wonders how many people will miss out on the saving of up to £140,000 simply because they do not realise that two forms are now required for Inheritance tax purposes in the UK.

ACTION PLAN

The action plan which you could activate now consists of three parts.

Write to the executors of your Will instructing them that you wish to claim the Residence Nil Rate Band (RNRB) and instructing them to complete a form IHT435 to make the claim. This will show your intent, should it be needed after your passing.

Keep a record of the sales of properties you have lived in with your Will.

If your estate is greater than £2 Million please contact us for advice on how to reduce your Inheritance Tax.

Article by Barry Davys

Barry DavysIf you are based in the Barcelona/Costa Brava area you can contact Barry at: barry.davys@spectrum-ifa.com for more information. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.