A significant change to inheritance tax rules comes into force this year which you need to be aware of.
Will it affect you?
If you are married with children (and/or grandchildren), own your own home and have assets above the nil rate band allowance (currently £325,000) then this change in the law could affect you.
What are the current inheritance tax rules?
Inheritance tax is a potential tax on your estate when you die. There is normally no inheritance tax to pay if the value of your net estate is below the nil rate band allowance (currently £325,000 applicable to every individual) or you leave the amount over £325,000 to your spouse/civil partner or to charity. Otherwise, unless an exemption or relief applies, which might attach to business assets and investments or agricultural property, the amount of your estate above this threshold tax is charged at 40% (this is reduced to 36% if you leave 10% of your net estate to charity). Don’t forget that the value of some gifts during the seven years prior to death might be added to your estate for the purpose of working out the value to be charged to tax. Do refer to our information leaflet on Inheritance for more information about this.
What is changing?
A new additional nil rate band allowance is being introduced when a residence is passed on death to a direct descendant. This is known as the residence nil rate band allowance and it is in addition to your normal nil rate band allowance (£325,000). It is being introduced in stages:
- £100,000 for deaths in tax year 2017 to 2018
- £125,000 for deaths in tax year 2018 to 2019
- £150,000 for deaths in tax year 2019 to 2020
- £175,000 for deaths in tax year 2020 to 2021
The residence nil rate band allowance will increase in line with the Consumer Prices index from 2021.
So the effect is that by April 2020 you will have a nil rate band allowance of £325,000 plus a residence nil rate band allowance of £175,000, equating to an inheritance tax allowance of £500,000. As with the nil rate band allowance any unused residence nil rate band allowance will be transferred to the surviving spouse/civil partner. Therefore, if a couple leave their estates to each other, then the surviving spouse/civil partner would have an inheritance tax threshold of £1million (subject to the restrictions and conditions discussed below).
Please be careful to note however that to take full advantage of the residence nil rate threshold, your residence will have to be worth at least £175,000 for a single person or £350,000 for a couple.
What happens if I downsize during my lifetime?
If you downsize or cease to own your own home (or did so after 8 July 2015), your estate can still benefit, as assets of an equivalent value up to the value of the residence nil rate band allowance can be passed to direct descendants.
You will need to keep records and we would suggest that such information is kept with your Will or other important documents. The rules are very complicated and you should consult us as soon as possible to discuss how your assets can be safeguarded for the next generation.
Are there any limits?
The residence nil rate band allowance is only applicable to deaths on or after 6 April 2017. However, if the surviving spouse/civil partner dies on or after 6 April 2017 then the residential nil rate band allowance of the first spouse/civil partner to die (even if before this date) can be transferred to the survivor’s estate.
For the purposes of the residence nil rate band allowance a direct descendant is a child or grandchildren. A child also can include a step-child, adopted child, fostered child and a child that they have guardianship over. If a property is left to a mixture of direct descendants and other relatives then the value of the home is apportioned to work out the inheritance tax due.
There is a limit to the application of the residence nil rate band allowance. If your net estate is worth more than £2million at the date of death then there is a withdrawal of £1 of the main residence relief for every £2 you are over the new threshold. In effect if your total estate is more than £2.5million you do not get any of the new allowance. If you believe your estate is over £2million it is recommended that you seek professional advice to see what estate planning can be undertaken to utilise the tax allowances.
If you do not have a direct descendant to leave your property to, then you cannot make use of the residence nil rate band allowance.
The residence nil rate allowance is limited to one residential property. If you have more than one property, your executors may be able to nominate which residential property should qualify. However, if you have never resided in the property (buy-to-let) then that property will not qualify for the relief.
What about trusts?
Be careful of using trusts in your Will. Some trusts mean that even if you leave the property to your children the new main residence relief will not apply. One particular trust structure that this applies to is the ‘nil rate band discretionary trust’, which at one time were very popular. Therefore, if you have one of these in your Will you need to review and possibly amend it to ensure that the residential nil rate band allowance applies to your estate.
5 practical things you can do now to be ready for April 2017
- Review the value of your estate for inheritance tax purposes
- Review your Will or make a Will
- If you have a nil rate band discretionary trust in your Will, you should review your Will
- If you have downsized or sold a property since 8 July 2015 make sure you have a record
- Seek professional assistance by contacting Mander Hadley’s Wills, Probate and Older Client Services team for further advice
In a nutshell:
An increase in the inheritance tax threshold is welcome. However, it is limited to those who are direct descendants.
The new rules are complex so you should seek professional advice when undertaking estate planning and a review of your Will.
At Mander Hadley our friendly and knowledgeable team will ensure you maximise the amount you are able to leave your family free of inheritance tax and make the estate administration process as straightforward as possible.
To find out how we can help you, please contact us.