Inheritance tax: the new residence nil rate band legislation

Family Law|May 4th 2017

This new legislation is applicable if an individual died on or after 6 April 2017.  It is relevant if you own a home or a share of a home and you have direct descendants – that is to say, children, grandchildren or other lineal descendants such as step children, adopted children or foster children. It also applies if you became someone’s guardian when they were under 18.

Inheritance Tax (IHT) is a tax payable at a rate of 40 per cent on the aggregate (total) value of an individual’s estate over and above the available ‘nil rate band’ – i.e. the proportion on which no tax is due. The IHT nil rate band for this financial year (2017/18) is £325,000 and this is a ‘transferable allowance’ between spouses as well as registered civil partners.  If the spouse who passed away first did not use up any of his/her nil rate band, there will be two full nil rate bands available at the surviving spouse’s subsequent death, allowing a tax free £650,000. Similarly, if the deceased spouse had used up one half there will be one and a half nil rate bands available when the second spouses passes away.

The new legislation introducing the ‘residence nil rate band’ is an additional allowance. It is available if an individual owns qualifying property and passes that property on to lineal descendants in their will. It has to be claimed within two years of the date of death by the executors of the will. The amount of relief will be determined by the date of death.  The allowance is being phased in as follows:

  • £100,000 in 2017/18
  • £125,000 in 2018/19
  • £150,000 in 2019/2020
  • £175,000 in 2020/2021

The allowance is however tapered where the estate passing is valued at more than £2,000,000.

Importantly the residence nil rate band only applies to the estate of a person who has died and does not apply to gifts or other transfers made during a person’s lifetime.

The residence nil rate band allowance can also be transferred by an individual to the estate of their spouse or civil partner.  This can be done even if the first of the couple died before the 6 April 2017, provided the surviving spouse died after that date. But the situation is quite different if you are not married or in a civil partnership.  Cohabitees cannot transfer their tax-free allowance and if they do not leave their home to their children, their residence nil rate band cannot be carried forward.

It is very important to get bespoke legal advice regarding this new legislation.  There are certain issues in relation to age contingencies (the need for a child/grandchild to reach a certain age before benefitting from a will) In order to maximise the tax reliefs available for individuals we would suggest a careful review of the terms of the will.

Photo by Quinn Dombrowski via Flickr under a Creative Commons licence.

Jane is a solicitor in Stowe Family Law’s Hale office in Cheshire. She has over 15 years of experience in wills, tax trusts and probate law and is a fully qualified member of the Society of Trusts and Estate practitioners (STEP).

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