In 2017 the government introduced a new Inheritance Tax allowance called the Residence Nil Rate Band. This new allowance provides a tax-free amount, currently up to £175,000 per person, if certain criteria are met. The Residence Nil Rate Band is available in addition to the existing Nil Rate Band of £325,000, although the new allowance needs to be specifically claimed when you die by your Executors or Personal Representatives.
The legislation is complex but essentially if you own a property, which has at some point been your home, and you leave that property to your lineal descendants (for example, children, step-children, grandchildren) on your death, you are likely to be entitled to the Residence Nil Rate Band.
The Residence Nil Rate Band is transferable between spouses and civil partners, so if one of you doesn't use it the other could have it added to their own allowances. Whilst the maximum allowance you might be entitled to is currently £175,000 (or £350,000 if a transfer occurs from your spouse or civil partner), the allowance is capped at the value of your interest in the property concerned. So if your house is worth £150,000, that is the maximum amount of allowance your estate can claim.
With Inheritance Tax rates at 40%, the Residence Nil Rate Band could save your estate tax of up to £70,000 as an individual or £140,000 as a couple. However, having access to the allowance relies on the provisions in your Will complying with the requirements of the legislation. Something as common as an age contingency on a gift to grandchildren (so they do not receive their inheritance until they reach the age of 18, 21 or 25) could mean the allowance is lost, either in whole or part. Certain types of trusts can also limit access to the allowance. It is therefore vital that you review your Will if you want to ensure the Residence Nil Rate Band is available to you.
If you downsize before you die, or sell your house because you enter care, there are provisions in place to ensure that your estate can still access the Residence Nil Rate Band. The same might not be true however if you gift your house in your lifetime for tax planning purposes. You also need to be mindful that if the value of your estate exceeds £2million, the allowance begins to taper away. With some careful later life tax planning you could take steps before you die to ensure this doesn't happen.
At Not For Profit Law we currently offer a free Will Review service for anyone who wants to check with a solicitor whether their Will is tax efficient and/or still does what they want. If you would like to take advantage of this offer please do get in touch.