Inheritance Tax Changes – Additional ‘Residence Nil-Rate Band’
The new tax year introduced a change to the Inheritance Tax system that potentially grants an extra nil-rate band on a deceased’s estate. This means less Inheritance Tax could be due (or possibly even no Inheritance Tax at all) when their estate would have been subject to it before this change.
Basic nil-rate band
The basic Inheritance Tax rules have not changed. Everyone currently has £325,000 as a nil-rate band on assets that pass on their death, if the total assets are worth more than this then the amount over is taxed at 40%. In some circumstances this nil-rate band (if un-used on a first death) can be transferred to a surviving spouse meaning they potentially have £650,000 available to their estate before any Inheritance Tax would be due.
The new Residence Nil-Rate Band
The changes have introduced a new, additional nil-rate band that is added to the basic amount, as described above, potentially giving an even larger amount that is effectively free of Inheritance Tax. This additional band, however, only applies in quite a specific set of circumstances.
You must own (or co-own) a residence that is included in your estate on death. This then needs to be left on your death to a ‘direct descendant’ including child, grandchild and even step-children (amongst others). It does not include nieces and nephews.
If the above criteria are met then the additional band may be available. The additional band is being phased in and for 2017/18 tax year it is £100,000. This means that if your share in a property is worth £100,000 or more and it passes under your will (or intestacy) to a ‘direct decedent’ then your estate potentially has £425,000 before Inheritance Tax would be due. As for the basic nil-rate band, any unused element of this residence band could be transfer to a surviving spouse (even if the first was to die before April 2017) which means they could (if the criteria is met) have access to £850,000 free of Inheritance Tax if they were to die in the current tax year.
The available residence nil-rate band cannot exceed the value of your share of the property on your death; therefore, if your share of the property is currently worth less than £100,000 then you can only claim the value that it is actually worth.
The amounts for future tax years are as follows, 2018/19 – £125,000; 2019/20 – £150,000 and 2020/21 – £175,000. This means that from 2020, providing all the criteria are met, including the residence being worth more than £350,000 but the total estate is worth less than £2million (as the additional band is tapered off if the estate is worth more than this) then there is potentially £1million free of Inheritance Tax available, however it is worth noting that there are not too many estates that are expected to hit this criteria perfectly.
There are provisions available if you were to downsize or cease to own a property after April 2015, including if you were to go into care, so that your executors can potentially claim the additional band as if you still owned a more expensive property (or a property at all) on your death.
It is only possible to give a snap-shot of the new rules in this article, for full advice or to see if any changes may be required to your wills you will need to speak to your solicitor or legal advisor.
Glenn joined Bates Wells & Braithwaite in 2009 and gained experience across the firm before qualifying as a solicitor in November 2015. He has a law degree from the University of East Anglia and took the Legal Practice Course at the College of Law, London.
Glenn is part of the firm’s Wills, Trusts and Probate department and specialises in wills, powers of attorney and the administration of estates.
Away from work, Glenn takes a keen interest in watching and playing various sports and is a long-term season ticket holder at his local football club, Colchester United. A lot of his spare time is also spent enjoying his young family.