Inheritance Tax – The Residence Nil Rate Band

06 Apr 2017

The government have announced plans to further assist people with potential inheritance tax problems.

From April 2017 the government is introducing an additional residence nil rate band which is intended to be set against the value of residential property, which is the homeowner’s main property, when they leave it to direct descendants such as children or grandchildren, which includes stepchildren, adopted children and foster children.

Currently there is a nil rate band where no tax is payable for estate values up to £325,000.  If couples leave their entire estate to each other then the nil rate band is transferable, meaning that on the second death the nil rate band is £650,000.  After the nil rate band is used inheritance tax is payable at 40% on the remainder of the estate.

The government’s intention with the residence nil rate band is to effectively increase the threshold of the value of people’s estates before tax becomes payable.

The additional tax-free amount will start of £100,000 in 2017 and will increase by £25,000 per year until 2020/21 when it reaches £175,000 per person. This means there is a potential through careful planning to have now up to £1 million available in an estate before inheritance tax becomes a payable.

The allowance will also be available to people who have previously owned residential property but no longer own it at the date death, for example if they have downsized or moved into care. The particular details relating to this are relatively complex and advice should be taken before any application is made for the relief.

The residence nil rate band will not have much effect for estates that exceed £2 million. Initially the residential nil rate band will be reduced at the rate of £1 for every £2 by which the estate exceeds £2 million. This effectively means any estate above £2.2 million will not receive any benefit from the residence nil rate band, this will rise to assets of £2.35 million by 2021 when the full £175,000 allowance is reached.

If people’s estates are in excess of £2 million then they should still take advice as it is possible to benefit through careful planning and use of the residence nil rate band as well as other forms of inheritance tax planning which can reduce the impact of inheritance tax.

The residence nil rate band can be lost if the property is placed into a discretionary trust. People who have created a discretionary trust in their wills should take expert advice to see what effect this may have. However some trusts can still benefit from the allowance if the trust gives children or grandchildren an absolute or life interest or it is another trust such as a bereaved minor trust, 18 – 25 trusts or disabled persons trusts.

It is only the main residence that is able to qualify although when there are multiple properties the personal representatives may be able to nominate which residential property should qualify. Property such as buy to lets and investment properties cannot be nominated.

So what do these changes mean to you?

It is really important that your will is reviewed carefully to ensure your estate does not miss out on this new valuable relief when you die. This is particularly true if, in your will, you have created certain types of trust, including discretionary trusts.

At Gard & Co. we have expert estate advisors who can help you to review your circumstances in light of the new legislation and see how it will affect you.  We can advise you of the best way to gift your property to make the best use of the nil rate band and the additional residence nil rate band.

If you would like further information or advice please contact Robert, Jane or Glenn who will be happy to assist you.