In the 2015 Summer Budget, the previous Chancellor of the Exchequer, George Osborne, announced the introduction of a new extension to the Inheritance Tax nil rate band for residences, with effect from April 2017.
You could save your family as much £140,000 in Inheritance Tax when the family home passes to direct decedents on death.
The Residence Nil Rate Band is in addition to an individual's existing nil rate band of £325,000, and conditional on a residence being passed down to direct descendants (e.g. children, grandchildren).
This may adversely affect those families who had planned to leave their property to a trust on death for the benefit of their descendants.
By 2020/21 families could pass on up to £1m of their wealth. As each parent will have their existing nil-rate band of £325,000 plus an Residence Nil Rate Band of up to £175,000.
Here are 10 key points to consider:
1. How much will is it?
The Residence Nil Rate Band was introduced on 6th April 2017 at £100,000. It will be phased in over 4 years increasing by £25,000 each year until April 2020 when it will reach £175,000.
2. Who can benefit?
The Residence Nil Rate Band is only available where a residence passes direct descendants on death.
3. Tapering the Residence Nil Rate Band
The Residence Nil Rate Band will be reduced by £1 for every £2 that the deceased's net estate exceeds £2m.
This will mean that there will be no Residence Nil Rate Band available if the deceased holds assets of more than £2.25m. This will rise to assets of £2.35m in 2021/22 when the allowance is £175,000.
4. When the Residence Nil Rate Band can be transferred?
The Residence Nil Rate Band will be transferable between spouses and civil partners on death, much like the standard nil rate band. It is the unused percentage of the Residence Nil Rate Band from the estate on first death which can be claimed on the second death.
This is irrespective of when the first death occurred.
5. What if the family home passes into trust?
The Residence Nil Rate Band may be lost where, the property is placed into a discretionary will trust for the benefit of the children or grandchildren.
6. What about downsizing?
The family home doesn't need to be owned at death to qualify. This is to help those who may have downsized or sold their property to move into care.
The Residence Nil Rate Band will still be available provided that the property disposed of was owned by the individual and it would have qualified for the Residence Nil Rate Band had the individual retained it.
7. Multiple Residences
Only one residential property will qualify and buy-to-lets do not qualify.
8. Basic Inheritance Tax threshold frozen
While families may be getting Inheritance Tax relief against the family home, the basic Inheritance Tax nil rate band will be frozen at £325,000 until the end of 2020/21 tax year.
Rising house prices mean Inheritance Tax planning has never been more important.
9. Joint tenants and the trap for large estates
Many families will hold the family home as joint tenants. Switching property ownership into tenants in common will allow each spouse to control how the property passes on death, and potentially preserve their entitlements to the Residence Nil Rate Band by keeping the surviving spouses assets below £2m.
10. Reviewing wills
It makes sense to keep wills constantly under review to ensure legislative changes do not adversely impact upon the distribution of your estate on death. Missing out on the Residence Nil Rate Band could see your Beneficiaries paying as much as an extra £140,000 in inheritance tax.
For further help you can contact Trust Matters Ltd on
Please note that these are our opinions and for information only. The content does not constitute advice. The information contained is for guidance only and is not a recommendation of investment or a financial promotion. Individual advice should be sought before you take action.