Do you benefit from the 2017 inheritance tax changes?

The new ‘Residence Nil Rate Band’ aims to put more family homes beyond the reach of inheritance tax.

Potentially, a couple could have a combined inheritance tax nil rate band of £1m from 2020.

The main Residence Nil Rate Band in a nutshell

The new rules effectively acts as an increase to the existing inheritance tax nil rate band of £325,000 per person. Until April 2017 anybody with an estate worth £325,000 or less falls outside the inheritance tax rules. From April 2017, this £325,000 limit will increase in certain circumstances.

The Residence Nil Rate Band is available for individuals who pass on their main residence to direct descendants such as children or grandchildren (and includes step-children, adopted children and foster children).

It applies to single people as well as married couples and civil partners.

However, if the net value of the deceased’s estate is above £2m, the additional main residence nil-rate band will be tapered away.

In short, although the Residence Nil Rate Band is likely to be a considerable benefit for many people, the rules are rather complicated so we recommend that you review your will to see how you could benefit.

Potential problem areas with existing wills

You cannot assume that you will automatically benefit from this additional tax-free allowance.

We recommend that you review your will if you think this extra tax allowance may be a benefit to you and, particularly, if the following circumstances apply:

Age limit on legacies to grandchildren - Many wills carry a condition that grandchildren must reach a certain age before they inherit (for example aged 21). The Residence Nil Rate Band will NOT be available under a will with such a condition, so such wills may require reviewing. Gifts to children are treated slightly differently.

The rules state that property must be left to “direct descendants”. What does that mean? - Direct descendants include children, grandchildren, adopted children, stepchildren and foster children (and others such as spouses of children etc). Whilst the term is fairly wide, it doesn’t include siblings, nephews, nieces or other relatives. If your will provides for non-direct descendants, or if assets are left on trust, it should be reviewed to ensure the allowance will apply.

Does this new tax allowance apply to single people? - Yes. If you are single or divorced, you may still have the benefit of the Residence Nil Rate Band.

Do all properties qualify for this relief? - No. The Residence Nil Rate Band can apply to one home only. Investment property that you haven’t lived in won’t qualify. If you own multiple homes or investment property, you should review your will.

What about co-habiting couples? - Co-habiting couples cannot pass the nil rate band between each other. You have to be married or in a civil partnership to be able to do this. Each one of the co-habiting couple will potentially have their own Residence Nil Rate Band and should each review their own wills.

Downsizing - If you sold a large house recently and downsized to a smaller, less valuable bungalow how will the new inheritance tax rules work? The Government does not want to deter downsizing so if the sale took place after 7 July 2015 then the Residence Nil Rate Band may still apply for your former property.

What about someone who has sold their house and has gone into residential care? - They could qualify, but only if the person who has gone into care sold or transferred their property after 7 July 2015. This is a complex area of the new legislation and we recommend that advice is taken.

Estates worth £2million or more - The Residence Nil Rate Band is gradually withdrawn for estates valued at £2million or more.
If your joint estate is worth more than £2million you should ensure that your will is up to date as changes could still be made to maximise the availability of this relief.

How is the Estate valued? - Even if an asset qualifies for other Inheritance Tax relief (such as business relief or agricultural relief) the value of that asset will still feature when calculating if an estate is worth £2million or more. The tax planning measures that you have taken so far may not help you to secure the Residence Nil Rate Band.

In Summary 

The devil is in the detail. Do not automatically presume that your estate will qualify.

We recommend that all clients review their wills in light of these new rules. If in doubt, please get in touch.