The Residence Nil Rate Band: Your Questions, Answered
New rules to help families avoid Inheritance Tax on the sale of homes after the death of loved ones come in to force next April.
The Residence Nil Rate Band will be added to the £325,000 which can already be left before the taxman gets a share of any estate.
But it is conditional on the main home being passed down to children or grandchildren.
It means by 2020/2021 that families could avoid Inheritance Tax on up to £1m of any estate, with each parent eligible for the £325,000 threshold before tax and the extra £175,000 of the new allowance.
Here’s some Questions and Answers to help you get to know the new rules.
Q. How much will it be?
A. The Residence Nil Rate Band comes into effect in April 2017 and will be phased in over four years. It will start at £100,000 with the full rate not available until 2020.
2017/18 £100,000
2018/19 £125,000
2019/20 £150,000
2020/21 £175,000
Of course, these are maximum amounts. The allowance will reduce if the property is worth less than this.
Q. When can the allowance be transferred?
A. It is transferable between spouses and civil partners on death, like the standard £325,000 allowance. It is the unused percentage of the allowance from the estate of the first to die which can be claimed on the second death, irrespective of when the first death occurred.
Q. Will there be cases when allowance won’t help?
A. Yes, those with large estates may not see any benefit. The allowance will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2m. For example, in the 2017/18 there will be no allowance for estates worth more than £2.2m, which will rise to £2.35m when the full allowance kicks in in 2020/21.
Q. Who can benefit?
A. It is only available when the main residence passes to children (including adopted, foster or step-children) or direct descendants such as grandchildren on death. But the rules do allow for the family home to pass into the joint names of the deceased’s child and their spouse.
Q. What if the family home passes into trust?
A. The allowance could be lost if the property is placed into a discretionary will trust for the benefit of the children or grandchildren. But some trusts are exempt. Check with your Innes Reid adviser.
Q. What about downsizing?
A. The family home doesn’t need to be owned at death to qualify. This is of help to those who may have downsized or sold their home to move into residential care or a relative’s home. It does not apply to properties sold before July 8, 2015. But there is no time limit between when the house is sold and when death occurs.
Q. What happens if the deceased owns more than one home?
A. Only one property qualifies, it will be up to the personal representative to nominate which one. Properties which were never a main residence, such as buy-to-lets, do not qualify.
Q. Is there any change in the basic Inheritance Tax threshold?
A. No, that has been frozen at £325,000 until at least 2020/21.
Q. Are there any traps to avoid?
A. Yes, some people may miss out on the additional allowance by not ensuring their estates are shared in the most efficient way, a danger especially for larger estates. If the couple’s combined estate on the second death is greater than £2m, the allowance could be lost due to tapering as explained above. This could be avoided by switching ownership into ‘tenants in common’, with each spouse able to control how the property passes on death. Contact your Innes Reid adviser for more details if you think this could apply to you.
Q. Do I need to change my will?
A. It makes sense to keep your will under regular review, with legislation changing all the time, to make sure you don’t lose out on any benefits or allowances.
This is a very simple overview in a complex area, so before any decision, it is always advisable to speak to an independent financial adviser. Contact Innes Reid for help and advice on 01244 347583 or email info@innesreid.co.uk to arrange a free, initial consultation – we are available at times to suit you.
