Those of you with a good memory may recall David Cameron’s promise back in 2007 to increase the Inheritance Tax threshold to £1 million for married couples. The 2015 Budget finally realised this aim, but although the headlines look appealing it is worth bearing in mind that terms and conditions apply.
The new allowance, known as the “Residence Nil Rate Band” will increase an individual’s Inheritance Tax allowance from £325,000 to £500,000 on death, giving us the magic £1 million figure for couples.
However, here come the main conditions:-
- It can only be set against property owned and occupied by the deceased, not assets generally or buy-to-let or investment properties.
- The full allowance will not be available until April 2020. It can be claimed in respect of deaths from April 2017 onwards and will start at an additional £100,000 allowance, increasing by £25,000 per year up to £175,000, making £500,000 when added to the standard £325,000.
- It is only available if the property is passing down the generations to children or grandchildren (including stepchildren, adopted and foster children) referred to as “lineal descendants”. Siblings and other relatives, unmarried partners and their children – all of these will miss out.
- The property must pass directly to your lineal descendants. Many types of trust funds for these relatives will not be eligible to claim the allowance.
- Estates worth over £2 million lose the extra relief on a sliding scale of £1 for every £2 over £2 million. This means that in this tax year an estate of £2.2 million will not be eligible for the additional rate at all.
In summary there are winners and losers with respect to this tax relief. For example, those who have no children, have large estates or rent their homes will pay more tax than they might otherwise.
But worry not, there are numerous planning options available to individuals and couples to ensure they fully utilise their tax free allowance. Making a Will or reviewing existing Wills to ensure their provisions do not inadvertently waste this additional allowance is a good place to start.
Also, if you are considering moving house or downsizing in the future, make sure you take advice beforehand to ensure your tax free allowance can be maximised for the benefit of your loved ones.
Sutton McGrath Hartley is a multi-disciplinary firm of chartered accountants, financial advisers and lawyers offering comprehensive financial expertise for all business, personal and family interests. Our specialist Wills & Probate department can help with the issues around the Residence Nil Rate Band. To discuss your requirements please contact Ben Schofield on 0114 266 4432 or firstname.lastname@example.org.