Changes in inheritance tax: how they could affect you
PUBLISHED: 16:34 29 September 2016 | UPDATED: 14:03 05 October 2016
It was announced in the Summer Budget 2015 that there will be an additional relief from inheritance tax to individuals who wish to leave their homes to their children
What are the changes?
Currently, when anyone dies, the first £325,000 of their estate is free from inheritance tax. This is called the nil-rate band (‘NRB’).
However, from 6 April 2017, there will be an additional nil-rate band called the residential nil-rate band (‘RNRB’). This will exempt the first £100,000 of a home’s value from inheritance tax, on the basis that it passes to a ‘direct descendant’. The NRB can then be applied to the balance of the property and/or other assets in the estate. The RNRB threshold will rise £25k every year to £175,000 by 2020/21.
Essentially, an individual may therefore be able to pass on as much as £425k free from inheritance tax (assuming that it comprises their primary home) and a couple may be able to pass on up to £850k.
Research carried out by Saga Investment Services found that, to date, more than a quarter of properties have sold above the £325,000 nil rate band in 2016 (a massive 72% of properties in central and outer London). With property prices reaching a record high, the RNRB will play an important role in protecting people from inheritance tax.
Are there any exclusions?
•The property must have been the residence of the deceased at some point, so buy-to-let properties will not benefit. If an individual has more than one home, only one can attract the RNRB
•This relief is reserved to those who leave their home to their ‘direct descendants’ (i.e. children, grandchildren, step-children)
•For estates that exceed £2million (even if the actual property is worth much less than this), the RNRB will be reduced by £1 for every £2 that the estate is valued over £2million.
It is worth noting that, if a party to a marriage or civil partnership dies, passing their estate to their partner, then inheritance tax does not apply due to the spouse exemption (as long as the surviving spouse is domiciled in the UK). However, the unused RNRB can be transferred to the surviving partner to be applied to their estate on their death. This is irrespective of when the first of the couple died, as long as the surviving partner dies after 5 April 2017.
What does this mean for me?
Given the complexity of the legislation, to benefit from this new relief it is essential that you revisit your Will to ensure that it is drafted in such a way that allows the relief to be claimed. People with the following arrangements should certainly have them reviewed:
•If you own your home as tenants in common and intend to place the shares of the first to die in a discretionary trust;
•If your Wills have left the estate of the first to die on life interest trusts to the survivor and/or include discretionary trusts for the children/grandchildren on the second death;
•If you are widowed and a nil rate band discretionary trust was implemented on the death of your spouse; and/or
•If you leave property to anybody other than your direct descendants.
For more information please contact Eleanor Gadd, Associate at asb law LLP.