On 6 April 2017, the new residence nil rate band allowance will come into effect. Are you ready and have you reviewed your Will in light of this?
Are you affected?
If you are married with children (and/or grandchildren), own your own home and have assets above the nil rate band allowance (currently £325,000) then this change in the law could affect you.
Before we consider the impending changes, we set out a brief outline of the current tax position
Brief outline of inheritance tax
Inheritance tax is a potential tax on your estate when you die. There is normally no inheritance tax to pay if the value of your net estate is below the nil rate band allowance (currently £325,000 applicable to every individual) or you leave everything to your spouse/civil partner, a charity or a community amateur sports club. Otherwise, unless an exemption or relief applies, above this threshold tax is charged at 40% (this is reduced to 36% if you leave 10% of your net estate to charity).
So what are the impending changes to the inheritance tax threshold?
What is changing?
A new additional nil rate band allowance is being introduced when a residence is passed on death to a direct descendant. This is known as the residence nil rate band allowance and it is in addition to your normal nil rate band allowance (£325,000). It is being introduced in stages:
- £100,000 for deaths in tax year 2017 to 2018
- £125,000 for deaths in tax year 2018 to 2019
- £150,000 for deaths in tax year 2019 to 2020
- £175,000 for deaths in tax year 2020 to 2021
The residence nil rate band allowance will increase in line with the Consumer Prices index from 2021.
So the effect is that by April 2020 you will have a nil rate band allowance of £325,000 plus a residence nil rate band allowance of £175,000, equating to an inheritance tax allowance of £500,000. Therefore, if the spouse/civil partner leaves his/her entire estate to his/her surviving spouse/civil partner then on the second death the survivor of them would have an inheritance tax threshold of £1million (subject to the restrictions and conditions discussed below).
As with the nil rate band allowance any unused residence nil rate band allowance will be transferred to the surviving spouse/civil partner (by way of a percentage uplift in the survivor’s allowance).
What happens if I downsize during my lifetime?
If you downsize or cease to own a home from 8 July 2015 then provided assets of an equivalent value, up to the value of the residence nil rate band allowance are still passed to direct descendants then your estate can still benefit. You will note that you will need to keep records and we would suggest that such information is kept with your Will or other important documents. The rules are very complicated and you should consult us as soon as possible to discuss.
The residence nil rate band allowance is only applicable to deaths on or after 6 April 2017. However, if the surviving spouse/civil partner dies on or after 6 April 2017 then the residential nil rate band allowance of the first spouse to die (even if before this date) is transferable to the survivor’s estate.
For the purposes of the residence nil rate band allowance a direct descendant is a child or grandchildren. A child also can include a step-child, adopted child, fostered child and a child that they have guardianship over. If a property is left to a mixture of direct descendants and other relatives then the value of the home is apportioned to work out the inheritance tax due.
There is a limit to the application of the residence nil rate band allowance. If your net estate is worth more than £2million at the date of death then there is a withdrawal of £1 of the main residence relief for every £2 you are over the new threshold. In effect if your total estate is more than £2.5million you do not get any of the new allowance. If you believe, your estate is over £2million it is recommended that you seek professional advice to see what estate planning can be undertaken to utilise the tax allowances.
If you do not have children you cannot make use of the residence nil rate band allowance, i.e. gifts to say nieces and nephews.
The main residence nil rate allowance is limited to one residential property. If you have more than one property, your executors may be able to nominate which residential property should qualify. However, if you have never resided in the property (buy-to-let) then that property will not qualify for the relief.
Be careful of using trusts in your Will, some trusts mean that even if you leave the property to your children that the new main residence relief will not apply. One particular trust structure that this applies to are nil rate band discretionary trusts. Therefore, if you have one of these in your Will you need to review your Will and possibly amend it to ensure that the residential nil rate band allowance applies to your estate.
5 practical things you can do now to be ready for April 2017
- Review the value of your estate for inheritance tax purposes
- Review your Will or make a Will
- If you have a nil rate band discretionary trust in your Will, you should review your Will
- Seek professional assistance – contact Natalie Payne or Jeffrey Cohen of Mackrell Turner Garrett for further advice
An increase in the inheritance tax threshold is welcome. However, it is limited to those who are direct descendants.
The new rules are complex and it is advisable to seek professional advice when undertaking estate planning and reviewing your Will. This is to ensure that you maximise what you can leave your family free of inheritance tax and to make the estate administration process as straightforward as possible.