Oonagh Murdock

Property and Commercial Update: The Residence Nil Rate Band

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New Inheritance Tax legislation may potentially benefit you and your children. But beware of the pitfalls!

As of 6th April 2017, a revised policy on Inheritance Tax will benefit some individuals with estates worth over £325,000 and their direct descendants. Prior to the introduction of this policy, an individual’s estate was subject to 40% tax on anything above the threshold of £325,000 upon their death. The introduction of the transferable nil rate band in 2007 effectively doubled this to £650,000 for a married couple leaving everything to the surviving spouse. In line with a previous manifesto promise, the government has now introduced new measures that will eventually raise the threshold for certain married couples to £1 million. But beware not everyone benefits from the new provisions!

The Residence Nil Rate Band will initially allow for up to an additional £100,000 of a property owner’s estate to be inherited tax free. However, this is subject to their residence meeting the qualifying criteria. This additional allowance will increase by £25,000 each tax year from 2017 until 2020/2021 at which point it will be £175,000 per person. It will then increase in accordance with the consumer price index.

As with the general nil rate band, this allowance is transferable upon death to a living spouse. In effect, this means that by 2020 married couples with property and direct descendants may be afforded up to £1 million of their estates to be inherited tax free. On the face of it, these changes appear to be straightforward however the detail of the new legislation is complex. Some of the potential pitfalls are summarised below.

  • The allowance can only be used against the value of the individual’s interest in their residence up to £100,000. If your interest is worth less than £100,000 then the additional nil rate band applied can be no greater than this value.
  • The deceased’s property must be inherited by their ‘direct descendants’. Individuals without direct descendants cannot apply the new allowance. Direct descendants are classified as children, grandchildren, stepchildren, adopted children and foster children. You should note however that nieces, nephews and siblings are not classed as direct descendants.
  • Once an estate exceeds £2 million, the residential allowance is subject to tapering. This means that for every £2 that the value of the estate exceeds this threshold, £1 will be withdrawn from the allowance. For an individual whose estate value is marginally over this threshold, careful life planning could help avoid such a reduction.

It should be noted that the residence nil rate band is only applicable for individuals who pass away after 6th April 2017. It is important to make the most of both the nil rate bands. If you require any further advice on inheritance tax or making a will, McKinty and Wright can help make planning for the future a clear and reassuring process.

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