Inheritance Tax - The Main Residence Nil Rate Band and what it means to you....

Inheritance Tax - The Main Residence Nil Rate Band and what it means to you....

In April 2017, the Government brought in to force the Main Residence Nil Rate Band. In its run up, it had caused quite a stir in the media with headlines such as:

“There’s no dodging death but inheritance tax relief could save £1m” – The Guardian 01/04/2017."

“Update your Will or lose this £70,000 inheritance tax perk” – The Telegraph 25/03/2017."

Here are the basic facts on how the new relief works and how it can affect the overall inheritance tax bill for your estate.

What is it?

The Main Residence Nil Rate Band is an additional allowance to the Nil Rate Band (currently £325,000) that each of us are entitled to. The additional relief however only applies to the main residence that you own. Therefore, if at the time of your death you owned your own home and also a 2nd property or a number of investment properties, the relief can only be applied to that which is your main residence. The second requirement in order for the relief to apply is that the property in concern is left to your direct descendants. HMRC have defined direct descendants as:

  • a child, grandchild or other lineal descendant
  • a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

They have even extended the definition of child to include:

  • a child who is, or was at any time, their step-child (A person’s step-child is limited to someone whose parent is, or was, the husband, wife or civil partner of that person.)
  • their adopted child
  • a child who was fostered at any time by them
  • a child where they’re appointed as a guardian or special guardian when the child is under 18.

What is the value of the relief?

For deaths in the current tax year (2017/2018), the maximum relief available is £100,000. For deaths in the following tax years, the relief will increase as follows:

  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

Does the value of my estate affect the relief available?

Yes! If the value of your estate is £2,000,000 or above, then the relief available will start to reduce. The new rules will apply a process known as ‘tapering’ and this in effect will reduce the relief available to your estate by £1 for every £2 of the estate value which is above the £2,000,000 limit.

What if I want to downsize my property or have to sell it to move in to a care home?

The Government have taken situations like this in to account and have confirmed that the relief can still apply in these scenarios provided that:

  • the person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
  • the former home would have qualified for the additional threshold if they’d kept it until they died
  • their direct descendants inherit at least some of the estate.

The implementation of the downsizing rules are however extremely complex even to HMRC’s standard so it is recommended that advice is sought beforehand for estate planning to ensure that you are able to utilise the relief available.

Can I transfer the relief my pre-deceased spouse/civil partner may have been entitled to across to my estate?

Yes! Provided that your spouse/civil partner leaves a home to their direct descendants and this home is included in their estate. This in turn could mean that provided your estate is below £2,000,000 and you have gifted your home to your direct descendants, then your additional allowance could be doubled up to £200,000 should you pass away in the current tax year.

What if my property is in trust?

If your property is held in trust either before you pass away or is transferred in to a trust after you pass away, then this is when matters can get slightly more complicated as it dependant on the type of the trust that the property has been transferred in to which will determine whether the additional relief if still available to your estate or not. It is recommended that legal/tax advice is sought before transferring property in to a trust. Likewise, you should seek further advice if your property is already subject to a trust to clarify whether the relief will still apply.

Should I review my Will to make the most of the new relief?

Yes! It should be noted that your Will is not only an instrument which sets out your wishes of who your estate is to pass to but can also act as tax planning tool so that your loved ones end up with more money in their pockets rather than the tax man.

Particular care should be taken if you have created trusts in your Will relating to your property and if you have left any gifts to direct descendants which are conditional upon them attaining the age of over 25.

If you wish to look at making a new Will or updating your current Will following the introduction of the new Main Residence Nil Rate Band then please contact Jasmina Warby, Solicitor, Private Client Department on 01926 356043 or email jasmina.warby@alsterskelley.com.

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