Wills, Probate, Tax & Trusts

Inheritance Tax Changes from April 2017

March 31, 2017

In July 2015, the newly elected Conservative Government announced the introduction of a new inheritance tax (IHT) allowance – the Residence Nil-Rate Band – which would allow married couples and civil partners to leave estates of up to £1 million free of IHT. The changes take effect in April this year but individuals without an up-to-date Will or who fail to take advice may lose out.

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The current rules

When someone dies, IHT is charged at a rate of 40% on the value of their assets which exceed the IHT Nil-Rate Band currently £325,000. No IHT is charged when a person leaves assets to their spouse, civil partner or to charity. Spouses and civil partners may transfer unused Nil-Rate Band allowances to the survivor of them, so that when the survivor dies he or she may leave assets of up to £650,000 free of IHT.

The new Residence Nil-Rate Band

As from 6th April 2017, an individual will have an additional allowance of £100,000 if they leave their “residence” to their “lineal descendants”. The value of the Residence Nil-Rate Band will increase by £25,000 over each of the next three tax years to £175,000 by 6th April 2020.

The allowance is limited to the value of a residence so a couple with a property worth less than £200,000 (or £350,000 post 6th April 2020) will not be able to claim the full allowance.

As with the Nil-Rate Band, spouses and civil partners may inherit each other’s unused Residence Nil-Rate Bands. This means that post 6th April 2020, a couple with assets of less than £1 million may not be subject to IHT on their estate at all.

How can I benefit from the new allowance?

The Residence Nil-Rate Band can be claimed if all of the following apply:

  • you die on or after 6th April 2017;
  • you leave an estate valued at less than £2 million;
  • you own a property which you occupy as your residence (i.e. this excludes commercial property or a buy to let which has never been your residence); and
  • you leave your residence to “lineal descendants” (broadly children and grandchildren) or to certain qualifying trusts.

I am the surviving spouse – can I claim a transferable Residence Nil-Rate Band?

If your spouse of civil partner died before the introduction of the new rules you may still be able to claim the Residence Nil-Rate Band. However, much will depend on the provisions of your spouse or civil partner’s Will.

I no longer own a “residence” – am I eligible for the allowance?

Potentially, yes. There are complex rules which apply to previously owned residences. If you no longer own a “residence” but owned one in the past then you should take legal advice.

What if I downsize?

The new rules allow individuals to preserve their full Residence Nil-Rate Band if they downsize to a less valuable property. The rules are complicated and you should take legal advice if you have or are intending to downsize.

My estate exceeds £2 million – what can I do?

You should review your Will and seek advice to see if there are ways in which you can arrange your affairs to take advantage of the new Residence Nil-Rate Band.

My Will incorporates a trust - do I need to change it?

Residential property passing to discretionary trusts will not qualify for the Residence Nil-Rate Band. If your Will incorporates a discretionary trust you will need to seek professional advice and, possibly, revise your Will.

What should I do now?

To ensure that you maximise the tax-saving effect of the Residence Nil-Rate Band we strongly recommend that you review your Will (or make a Will if you don’t have one already). The conditions for claiming the Residence Nil-Rate Band are complicated and you should seek expert advice to ensure that you and your family can benefit from the changes.

Get in touch with our specialist Wills, Probate, Tax & Trusts team for more information. Call on 0117 929 0451. 

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