What is the new Residential Nil Rate Band?
Under the current regime Inheritance Tax (IHT) is payable on the death of an individual’s net estate over the sum of £325,000 (this is known as the “nil rate band”) and unless any tax reliefs apply, the rest of that person’s estate is then taxed at 40%. For couples who are married, or in a Civil Partnership, if the first to die has not used their full nil rate band, their allowance can be transferred to the surviving spouse/civil partner. This usually occurs when the first to die leaves their entire estate to their spouse/civil partner as such gifts are tax free.
From 6 April 2017 the Government is bringing in an additional “residential nil rate band” to be set against the value of a residential property when it is left to their “lineal descendants”. Lineal descendants includes children, step-children, adopted children, foster children and grandchildren. The additional tax free amount will be £100,000 per person in 2017 and this will increase by £25,000 a year until 2020/21 when it reaches £175,000 per person.
What if my spouse/civil partner has died?
As with the existing nil rate band, married couples and civil partners will be able to transfer any unused residential nil rate band to the survivor, which means that by 2020/21 a married couple/civil partners will have a maximum available allowance of £1 million to pass down to their descendants tax free. (£650,00 + £350,000). This will apply even if your spouse/civil partner has died before 6 April 2017.
For this new regime to apply, the person who dies must have a “qualifying residential interest”. This means an interest in a property that was the deceased person’s residence at some time during their ownership, which is comprised in their estate when they die. If there are two or more qualifying residential interests, only one can be used to qualify for the residential nil rate band.
Are there any exceptions?
As with most tax legislation this will not apply to everyone. If your Estate exceeds £2. million there will be a tapered withdrawal of the residential nil rate band of £1 for every £2 over the threshold which will effectively cancel out any additional benefit.
What if I sell my home and go into Care?
If you downsize or move into a Care Home (after 8 July 2015) you can still claim the residential nil rate band if you previously owned a qualifying property. However, you must have lived in the property so ‘buy to let’ properties will not qualify.
Will this affect my Will and current arrangements?
Not necessarily but it may do. It would be sensible to review your Will to see whether any changes should be made. It may be that your Will was made many years ago and does not now accurately reflect your wishes, or have been drawn up in the most tax efficient way in the light of this new legislation.
Our expert team at Parchment would be happy to discuss this further with you, whether you are an existing client or not, and help you ensure that you and your family benefit from the maximum allowances possible for your circumstances.
