Inheritance Tax & the new Residence Nil Rate Band

Paying Inheritance Tax is a common concern for those who are considering estate planning and preparing their Will.  It would be hard to find anyone who would relish in the idea of their estate paying tax after they pass away on assets that have already attracted tax during their lifetime. Recent developments in inheritance tax legislation have therefore been eagerly awaited especially in response to political promises of a £1million pound inheritance tax exempt allowance.

The reality is not as straightforward as had been hoped and unfortunately will not be beneficial for everyone.  It is therefore important to know how you are personally affected by the change and what you should do next to ensure that your inheritance tax burden is minimised as much as is possible.

Each individual has what is known as a ‘nil rate band’ of £325,000 which does not attract inheritance tax.  There are certain reliefs available for businesses and agricultural property however, generally speaking, assets over and above this threshold will attract inheritance tax after death at a rate of 40%.

In the case of married couples or those in a civil partnership, if the first to pass away leaves everything to the other, it is possible for the surviving spouse to claim the unused nil rate band and so effectively ‘double-up’ to a  £650,000 nil rate band.  This is known as the ‘transferable nil rate band’.  There is no transferable nil rate band between partners or cohabitees regardless of the length of the relationship.  If you are in a long term relationship, whether or not your individual assets exceed £325,000, it would be wise to seek advice regarding your Wills and estate planning options that may be available to you.

For deaths that occur from the 6th  April 2017 the estates of those that qualify will also be able to claim an additional nil rate band known as the ‘residence nil rate band’.   For the current tax year 2017/2018 this additional allowance is £100,000 per person.  This is set to rise annually up to 2020/2021 when it will reach £175,000 per person.

In the same way as the original nil rate band, it is transferable between spouses and civil partners making it possible to have an additional £350,000 of residence nil rate band to add to the original £650,000 mentioned above which brings a married couple to the promised £1million pound nil rate band to be exempt from inheritance tax.  Again please note that this only applies to married couples and those in a civil partnership and so individuals who are not married will not be able to reach a £1million pound exemption.

As previously stated not everyone will qualify for the additional residence nil rate band.  To qualify you must have a residence or an interest in a residence that is being ‘closely inherited’.  Closely inherited means that you are passing that residence to a lineal descendent meaning to your child or grandchild.  Child has been widely defined and includes step-children, foster children, adopted children, natural children who have been adopted by a third party and also the spouse of a child if that child has predeceased you (your son or daughter-in-law).

No other family connection will suffice as a lineal descendent.  If you do not have children or grandchildren then it will not be possible to claim for the additional residence nil rate band.

It is important to note that if you have left your estate as a whole between your children, grandchildren and other beneficiaries such as nieces, nephews and/or charitable organisations this will prevent your estate from being able to claim for the residence nil rate band.  The whole property must be inherited by a lineal descendent and it is not enough that they are one of the beneficiaries.  If you have a Will that leaves your estate between several beneficiaries who are not your lineal descendants, it would be advisable to review your Will and ensure that it is the most tax efficient Will now available to you.

The lineal descendent also has to inherit the property outright or at least have an immediate interest in the property after death.  This means that if the property falls into a discretionary trust, even those that are for the benefit of the children, the additional residence nil rate band will not be available to the estate.   There are certain types of settlement that would still allow your estate to qualify for the residence nil rate band.  If you presently have a trust in your Will and have assets over and above the £325,000 threshold then do please seek advice as to whether your Will remains the most tax efficient way forward in light of the new legislation.

To qualify for the full residential nil rate band your net estate also has to be less than £2million pounds in total.  If you have an estate worth more than two million pounds then you lose £1 for every £2 that you are over that threshold.  In this part of Lincolnshire it is not too common for an estate to be worth more than this threshold but for those with property in London it is certainly a clear issue and another possible bar for being able to claim the additional relief.

The new legislation prompted many to worry about what would happen if they sold their large family home and downsized or, sold their home altogether and moved into residential care or other accommodation.  Complex ‘downsizing’ legislation has therefore been produced to calculate a percentage of the residence nil rate band available on death where a downsizing has occurred or where a property has been sold.  This is easier to look at on a case by case basis rather than within the context of this article however a simple example can be seen below:

‘Mabel, who is a widow, sells her bungalow for £250,000 in 2020 and moves into residential care.  Presuming that she left her estate to her lineal descendants, as the value exceeded the residence nil rate band available, she would be treated as having an entitlement of 100% of the available residence nil rate band on death being the full £175,000.’

Essentially if you have owned a property and treated it as your residence at any point prior to death then it will be possible for the representatives of your estate to seek advice regarding the downsizing provisions and see if it is still possible to claim for the residence nil rate band for your estate.  It will also be possible for them to seek advice concerning a previously owned property if you are now in a property of a lesser value however it will never be possible to claim for more than the maximum residence nil rate band available in any given tax year regardless of the value of the property.

If you have an estate worth more than £325,000 and especially if you own a residence within your estate, it would be wise to seek advice regarding your Will to ensure that you have made the correct provisions to also qualify for the residence nil rate band and thus reduce your liability to inheritance tax.

Our fees for making a single Will are £135 plus VAT or £220 plus VAT to make mirror Wills (usually for couples). Unless you have exceptional circumstances meaning an individual higher fee will be quoted, this fee will include an in depth discussion as to your inheritance tax position and effective estate planning options available to you.  The expense at this stage could potentially save your estate a large inheritance tax liability at a later date.

To discuss Wills, please contact one of our lawyers in the Wills and Probate Department:-

Faye Blair- faye.blair@maplessolcitors.com

Jamie Dobbs- jamie.dobbs@maplessolicitors.com

Jane Mawer- jane.mawer@maplessolicitors.com

Or telephone the office 01775 722261 and ask to speak with one of the team.