New residence nil rate band tax allowance – will you benefit?
Under the new inheritance tax rules, families may find that no inheritance tax will be payable on their estate. Does your Will take the new legislation into account?
In the 2015 budget review, the government announced that an additional inheritance tax allowance would apply for estates where a deceased person leaves his or her residence to their descendants. This allowance came into effect for deaths on or after 6th April 2017.
What is the Residence Nil Rate Band?
Broadly speaking, the Residence Nil Rate Band is a tax free allowance for people who leave their family home to their children and grandchildren and is additional to the existing inheritance tax free allowance (Nil Rate Band), which is currently £325,000.
The allowance has to be claimed and is subject to a number of potential traps. The allowance for the tax year 2017/2018 is up to £100,000 per individual, rising in stages to £175,000 by the tax year 2020/2021.
Combining the current Nil Rate Band of £325,000 with the new Residence Nil Rate Band means that by 2020/21 each individual can potentially have an inheritance tax free allowance of £500,000 (or £1,000,000 potentially for a couple with children/grandchildren).
Who can benefit from the Residence Nil Rate Band?
The Residence Nil Rate Band will only be available if an individual owned a property which was also their residence at some point during their life. The property must be left to a direct descendent, which includes children, step-children, adopted children and grandchildren but excludes nieces and nephews and other relatives. The rules do however allow for the allowance to be applied where the residence is left to a spouse of the descendent, such as the widow of a deceased child.
Transferable Residence Nil Rate Band
If you leave your residence, or part of it, to your spouse or civil partner, it is spouse exempt for Inheritance Tax purposes. As with the standard Nil Rate Band, the unused portion of the Residence Nil Rate Band, can potentially be claimed by the surviving spouses’ estate provided their estate qualifies for the allowance itself.
This even applies in cases where the first spouse has passed away before 6th April 2017, provided the death of the surviving spouse occurred on or after 6th April 2017.
Are there any other restrictions which will prevent my estate from benefitting from the Residence Nil Rate Band?
If you meet the conditions referred to above your estate may still not necessarily benefit from the Residence Nil Rate Band. There are numerous pitfalls which can mean that your estate may lose the benefit of the Residence Nil Rate Band including:-
- Age conditions on certain gifts.
- The use of inappropriate trusts in your Will.
- If the value of your estate is too high.
What if I have sold or gifted my residence during my lifetime?
There are downsizing provisions that can rescue the relief in certain circumstances even if you have sold the house before your death, for example to move into a care home.
As you will appreciate, this is a complex legal area. It is important that you make a Will that takes the new legislation into account, or if you already have one you need to review it to ensure its provisions do not conflict with the new allowance.
To arrange a meeting to make a new Will and obtain advice on whether or not your estate can benefit from the Residence Nil Rate Band please contact us on 01707 387074.