On 6th April 2017, amendments were made to inheritance tax law courtesy of the new ‘residence nil rate inheritance tax break’ came into operation.
The new ‘nil rate band’ applies where a residence passes to a direct descendent. This means a child, grandchild or great-grandchild, etc. including an adopted child, foster child or step-child. Where direct descendants are inheriting an estate incorporating a main residence and the total value of the estate exceeds the IHT threshold of £325,000, they should now pay a lower amount of inheritance tax.
Previously, all beneficiaries, including direct descendants, would have to pay 40 per cent tax on anything inherited that exceeded £325,000. However now direct descendants get additional tax relief via the nil rate band which provides a top-up of £100,000 per person during 2017-2018. This will rise to £125,000 during 2018-2019 and then increase again to £150,000 during 2019-2020. £175,000 will be the top up once we get to 2020-2021, and then consumer price inflation (CPI) will take over how the figure rises over the years that follow.
In a nutshell, this means that by 2020, direct descendants of couples leaving an estate valued at less than £1 million will have no inheritance tax to pay at all.
Transfers and Tapering
The nil rate band is transferable by means of a claim to a surviving spouse or civil partner when not used. If the deceased had downsized or ceased to own a home on or after 8 July 2015, then descendants can claim to use the nil rate band if they inherit a residence or assets to the same value up to the limit of the nil rate band.
For estates that exceed £2 million and above, a tapering rule applies. It works by tapering away the additional nil rate band by £1 for every £2 over £2 million. So if an estate is worth more than £2.2 million, then the £325,000 IHT threshold will apply.
Main residences held in discretionary trusts will not usually form part of the estate and the nil rate band will not therefore apply, even if the property is being left to direct descendants.
Time to Review Your Will?
It is quite a complex set of rules and even lawyers concur that the conditions are highly complicated and need a good degree of understanding so that they can be made to work in the most effective way for particular situations.
If you are leaving your estate to direct descendants, you should most certainly be reviewing your will in light of the new nil rate band. Making a will is especially important if you are a business owner, so be sure to consult with a solicitor if you have not yet made one, or need to update the one you have.