The introduction of the residence nil-rate band for inheritance tax announced by George Osbourne in July 2015 in the United Kingdom was introduced in stages from 2017 has led to a good deal of questions.
Previously inheritance tax was at 40% of anything over £325,000 for a single person. This is doubled for married or civil partners who can pass £650,000 tax free to a surviving spouse.
Inflation in house prices has meant that many middle class families who were not affected by inheritance tax before are now being caught in the net because so many more properties are worth more than £325,000. This led to the government’s proposal to introduce inheritance tax-free allowances specifically for main residences.
The new rates mean the following:-
- From April 2017 an additional residence nil-rate band of £100,000 per person will be introduced bringing the threshold to a possible £850,000. However, this only applies to main residences and direct descendants.
- From April 2018 the additional residence nil-rate band will increase to £125,000.
- From April 2019 the additional residence nil-rate band will increase to £150,000.
- From April 2020 the additional residence nil-rate band will increase to £175,000.
This means that by 2020 a house worth £1 million can be passed free from inheritance tax thus achieving a promise made some time ago by the conservative party to raise the threshold for a married couple to £1 million.
However the complex rules means that there are many factors to be considered, such as:-
- Unmarried couples do not have the right to pass on nil-rate bands
- Only direct descendants can benefit therefore complex structures involving trusts especially where persons other than direct descendants benefit will need to be advised on by a professional
- This only applies to main residences, therefore if a family owns more than one property consideration will need to be given as the allowance can only apply to one home.
- Estates exceeding £2 million nil-rate bands will be reduced and estates exceeding £2.7 million may lose the residence nil-rate bands altogether
- Elderly persons wishing to downsize or move into a home will also need to take advise so as to not lose the allowance
Therefore although a lot of families may now benefit from at least a reduction in inheritance tax proper planning should be considered in order to benefit fully from the new proposals.