Under the new inheritance tax rules for deaths on or after 6th April 2017 a new “residence nil rate band” has been introduced. In certain circumstances this new rule could eventually allow estates worth £1 million to pass free of inheritance tax.
The legislation sets up a separate new nil rate band claimed against one property (which must have been lived in at some point by the individual)which is gifted to direct decedents (i.e children and grandchildren). This band is £100,000 currently but is due to be increased over the following tax years to £175,000 by 2021. The band will also be able to be claimed where the individual has downsized during their lifetime and the assets generated from the sale are left to a direct descendant. However, this band will be tapered if the net value of the estate exceeds £2 million by £1 for every £2 over this limit.
The £1 million exemption
In certain circumstances estates up to the value of £1 million could eventually be totally exempt from inheritance tax. This is due to the fact the residence nil rate band works alongside the current nil rate band of £325,000 meaning that by 2021 an individual would be able to pass £500,000 free of tax.
As with the current nil rate band when the first spouse in a married couple dies the surviving spouse is able to utilise the deceased’s residence nil rate band and their ordinary nil rate band. With both nil rate bands totalling at £500,000 when utilised by a surviving spouse along with their own it is possible £1 million pass tax free.
Whilst the additional residence nil rate band may seem to benefit many people the nil rate band of £325,000 has been frozen at the current amount until 2021 meaning those that do not benefit under the new rules will not see an increase in their exemptions for some time.
Do you want to act upon this news?
This is just an overview of the new rules and if you want to take further advice, review your Will or make a new Will based on the above information to take advantage of the new allowance please do not hesitate to contact a member of the Private Client department.