What the New Residential Nil Rate Band Means for You
Posted:25th May 2016
Here at EMG, I specialise in estate administration, trust administration, inheritance tax planning and asset protection. The laws regarding my expertise are constantly changing, so it is important to keep our clients up to date with regular changes that may affect them.
As of April 2017, a Residential Nil Rate Band will be introduced, potentially raising the Inheritance Tax threshold for homeowners to £850,000 for married couples or civil partners; rising to £1m by April 2020, if their home is worth at least £350,000 and their joint estate is under £2m.
Currently, taxpayers in the UK can leave an estate valued up to the nil-rate band (£325,000) free from Inheritance Tax. A married couple can potentially leave £650,000 free of inheritance tax. Anything in excess of this amount will be subject to Inheritance Tax at 40%.
The new Residential Nil Rate Band will be added to the current nil rate band, and will apply to homes passed down to direct descendants (children, stepchildren, adopted and foster children, and grandchildren). The aim of this is to reduce the burden of Inheritance Tax by making it easier for you to pass on your family home.
By 2020/21, each parent will have a nil-rate band of £325,000 plus an additional £175,000, provided that their estate includes a property worth at least this sum and their estate is valued under £2m in total.
The Main Residence Nil Rate Band will be transferrable between spouses on death. Therefore, a couple may have a transferable nil-rate band of £650,000 plus a transferable residential nil rate band of £350,000.
However, parents who have made Wills to include a discretionary trust of their residuary estate on the survivor’s death to ensure their estate is protected for their children will not be entitled to the Residential Nil Rate Band. The reason for this is because, on death, the trustees will take on legal ownership of the property and are not classed as ‘direct descendants’. However, it is possible within 2 years of death to change this structure and still qualify for the residential nil rate band.