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Changes to Inheritance Tax

From the 6th of April 2017 the government has put into effect an additional Nil Rate Band for the purposes.  Known as the residence Nil Rate Band, this will exempt the first £100,000 of a home’s value from inheritance tax, on the basis that it passes to a direct descendant.

What is a Nil Rate Band?

Every estate in England and Wales has an allowance up to which point it will not be liable for payment of Inheritance Tax. At present the threshold is £325,000. This means that there is no inheritance tax levied upon the first £325,000 of an estate but any figure above that amount incurs inheritance tax at a rate of 40%.

The Residential Nil Rate Band (RNRB)

From April 6th 2017 an additional allowance is being introduced for estates that are subject to Inheritance Tax. Only estates that are leaving their residence to their Direct Descendants will be able to claim this allowance.

This will be:

£100,000 in 2017 to 2018

£125,000 in 2018 to 2019

£150,000 in 2019 to 2020

£175,000 in 2020 to 2021

This means that by the 2020-21 tax year an estate will potentially have up to £500,000 available. The allowance reduces in relation to estates over the value of £1,000,000 so that it will not be available to estates that have a total value of over £2,000,000.

Who are Direct Descendants?

A Direct Descendant includes children, grandchildren and remoter descendants but not collateral descendants such as nieces and nephews. Direct Descendants for these purposes also includes anyone who was, at any time, a step-child, foster child, an adopted child or any child for whom the deceased acted as the guardian or special guardian. Any current spouse or children of any of the above are also included along with surviving spouses or civil partners of a lineal descendant who died no later than the deceased provided that the survivor had not remarried or formed another civil partnership before the deceased’s death.

Transferable Nil Rate Band

Any portion of the Nil Rate Band (including the RNRB when introduced) that has not been used can be transferred to a spouse for use upon the death of the second spouse to die this means that there is potentially up to £1,000,000 available tax free. This was introduced in 2007 because anything that is left to your husband or wife is not subject to inheritance tax as they benefit from a spousal exemption and it was seen as unfair that as a result the first spouse would, in effect, lose their tax-free allowance. If you created a Discretionary Trust to ensure that your estate made use of its Nil Rate Band then it is important to review your Will now.

What do you do now?

In order to receive the RNRB it is necessary to leave your residence to your Direct Descendants. As such in situations where your entire estate is passing into a Discretionary Trust your estate may not be eligible for the RNRB. It is important that existing Wills are reviewed to ensure that this allowance can be claimed. In addition, if you do not have an existing Will, it is important that you prepare a Will in light of this legislation to ensure that your wishes can be enacted. Tim Metcalfe specialises in Wills and Estate Planning, if you would like to talk through any questions or concerns about your personal circumstances,  give him a call on 01284 731926 or email him at tim.metcalfe@atkinsthomson.com.