The Government introduced the new “residence nil rate band” which is given in addition to the usual inheritance tax allowance of £325,000 per person (as at 2016/2017). An estate will be entitled to the new allowance if :
• the individual dies on or after 6 April 2017
• the individual owns a home, or a share of one, so that it’s included in their estate
• the individual’s direct descendants such as children or grandchildren inherit the home, or a share of it; and
• the value of the estate doesn’t exceed £2 million
The Government claims that family homes will be passed on free of inheritance tax from this April but in some cases beneficiaries could find that they are left with an 80 percent inheritance tax bill.
The new “residence nil rate band” is being brought in gradually over the next 4 years. From April this year an individual will receive an additional £100,000 allowance to add to their existing £325,000. The allowance will then rise in increments of £25,000 over the next three years until in 2020/21 when the “residence nil rate band” allowance will be £175,000. This means a couple will have an inheritance tax allowance of £1 million.
If a couple’s combined estate is worth £2.3 million there is no “residence nil rate band” allowance available, this will mean any beneficiaries who are direct descendants will pay £660,000 in inheritance tax.
However, if their combined estate is £2 million and the property had two original owners, the full additional allowance of £200,000 (from 6 April 2017) is available. This will reduce the amount subject to inheritance tax to £1.15 million and an inheritance tax bill of £460,000.
As the gradual increase in the “residential nil rate band” is applied over the next 3 years it is only going to highlight further the difference in the amount of inheritance tax payable on estates exceeding £2 million if the threshold remains capped at £2 million.
It is important to remember that some assets are exempt for inheritance tax purposes, such as those assets attracting business property relief and agricultural property relief but they will count towards the new “residence nil rate band” allowance, so thought should be given to the most tax efficient way to hold these assets.
It may be that, in some cases, the lump sum death benefits from pensions, employer’s schemes and life assurance policies that would traditionally be held in Trust and fall outside the estate, should be brought into the estate to ensure that full advantage can be taken of the new rules.
The Government’s new £1 million allowance will actually apply to remarkably few people.
It is important that you seek legal advice to see just how the new rules will affect you and to ensure that you are utilising your assets in the most tax efficient way.
In a nutshell the new “residence nil rate band” is too good to be true.
To discuss the residence nil rate band or for more information, please contact email@example.com