On 6 April 2017, the new residence nil rate band allowance comes into effect. In readiness for this, do you need to review your Will?
Does this affect you?
These changes could affect you, especially if you own your own home and are married with children and/or grandchildren who will benefit from your Will.
Inheritance Tax (IHT) 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 which is currently £325,000 per person. There would not be any IHT to pay if you left everything to your spouse, a charity, a political party or a community amateur sports club. Otherwise, IHT is normally charged at 40%. There are possible variations to this amount, such as reducing the amount of IHT to pay at 36%, providing you leave 10% of your net estate to a Charity.
The new additional nil rate band allowance starts to come into force from 06/04/2017 and is available when a residence is passed on death to a direct descendant. This 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.
This means that by April 2020, each person would have their allowance of £325,000 and providing they own a residence there is the additional residence nil rate band allowance of £175,000, equating to an IHT allowance of £500,000 per person.
If a spouse/civil partner leaves their entire estate to their surviving spouse/civil partner, it means that on the death of the survivor, there is the potential to use £1million of IHT allowance subject to any restrictions.
What happens if I downsize during my lifetime?
If you downsize, or cease to own a home from 8 July 2015 then provided assets of an equivalent value, up to the residence nil rate band allowance are still passed to direct descendants then your estate can still benefit. Records should be kept with your Will to prove ownership of your previous property.
Although the new nil rate band is only applicable to deaths on or after 6 April 2017, if the surviving spouse/civil partner dies on or after 6 April 2017 then they may use their own new allowance, and that of their deceased spouse/civil partner. This is called transferrable nil rate band.
In order to use the new nil rate band allowance, the asset must pass to a direct descendant i.e a child or grandchild. This can also 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.
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. If your total estate is more than £2.5million, you do not get any of the new allowance.
If you do not have children, you cannot make use of the residence nil rate band allowance, i.e. gifts to say nieces and nephews.
The main 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.
In order to ensure that the new increase applies to you, you may have to change certain Trusts within your Will, such as a nil rate band discretionary Trust.
- 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.
- Talk to LCS now to discuss your options.
- If your estate is over the IHT allowances, call us now on 0345 017 8250 to make an appointment with one of our associate financial advisors.
Whilst this increase is welcome, it is limited to those who are direct descendants.
In order to maximise your IHT allowance, speak to LCS now on 0345 017 8250 and ensure that you leave the most that you can to your family after your death.