I can explain this best by looking at two different families, the Bennets and the Darcys, to see the differences.
Mr & Mrs Bennet’s house is worth £500,000 and they have savings of £300,000. Their Wills leave their estates to their children, after they have both died.
Before 5 April 2017, there would have been inheritance tax at £60,000 to pay on the second death. This is because individuals have an automatic £325,000 tax-free allowance (nil rate band). For married couples or civil partners, this meant a combined £650,000. Any assets over that amount were taxed at 40%.
However, since 5 April 2017 and onwards, there will be no inheritance tax to pay on the Bennets’ estates when they die because of the additional £100,000 RNRB, (£200,000 together) tax-free allowance.
However, beware these pitfalls.
The RNRB will rise incrementally each tax year until 2020 - peaking at an additional £175,000 per person or £350,000 per married couple or civil partnership. This sounds good but requires complex calculations to determine how much relief is available depending on the size of the estate.
Secondly, there are strict eligibility criteria for estates to qualify for the new allowance, including that a couple must have lived at some stage in the property and the property must pass to their children. So, if the Bennets' property had been an investment property (and not their own home) the new RNRB tax-relief is denied.
Another issue for those families leaving estates to their children valued at over £2 million is that the RNRB will be subject to tapering off rules and lost altogether for estates in excess of £2.7million.
Mr & Mrs Darcy have combined estates of £3 million. The inheritance tax bill on the second death will be £940,000 as a result of the tapering off rules - zero relief after £2.7million.
So what can be done for people like the Darcys? If, for example, they had made lifetime gifts to their children, reducing their estate to £2 million, both Mr and Mrs Darcy's estates would benefit from their combined RNRB tax reliefs, reducing the tax due by £140,000.
However, again beware. Making lifetime gifts is not necessarily as straightforward as it might seem. If the wrong assets are given away, a capital gains tax bill could be triggered and it is vital to ensure that sufficient assets are retained for the parents' own needs.
To ensure that your estates are making all the tax-savings they can correctly qualify for, it is vital to seek professional advice when preparing your Wills and to regularly review the position with your advisor.