Trusts & Wills

Do You Qualify For The New Residence Nil Rate Band?

From 6th April, new changes to the Inheritance Tax (IHT) regime will come into force. One of the main beneficiaries of the new rules will be those whose residential home is valued at £2 million or less. By 2020, if they are married, they may be able to leave up to £1 million to their direct descendant's tax-free thanks to the residence nil rate band.

What are the current IHT rules?

At present, each person in the UK has a nil rate band of £325,000.  This can be transferred between married couples if they choose to leave their estates to each other, meaning that spouses can ultimately pass on an estate valued at £650,000 tax-free.

The value of the estate over the nil rate band will be taxed at 40%.

How does the resident's nil rate band work?

From April 2017, a new residence nil rate band will apply to residential property.  The nil rate allowance has been set at £100,000 for the 2017/18 tax year, increasing by £25,000 over the next four years so that by 2021, the tax-free allowance on the main residence will be £175,000.

Are there any conditions attached to the residence nil rate band?

The tax-free allowance only applies to the testator’s principal residence.  If he or she owns multiple properties, they can only apply the residence nil rate band to one of their homes.  The property must be passed on to direct descendants for the allowance to apply.

Who is classified as a direct descendent?

Direct descendants are defined as children, step-children, adopted children, foster children, grandchildren, or surviving spouse or civil partner.

Are buy-to-let properties included?

Unfortunately no.

What if my property is held in trust?  Will the tax-allowance apply?

It depends, so it is important that you receive legal advice.  If your property is held in a discretionary trust, it is highly likely that it will be excluded from the resident nil rate band.  A solicitor will need to ensure the terms of the trust are changed, so the beneficiaries of the trust are the settlors’ direct descendants.

To find out more about the changes to the IHT rules, you can search through Solicitors Guru to find an experienced private client solicitor in your area.

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