Currently each individual has an allowance for Inheritance Tax purposes known as “the nil rate band” (NRB) which is currently £325,000.00. Transfers between spouses are exempt from Inheritance Tax whether during lifetime or upon death and in circumstances where one spouse leaves his or her estate to their surviving spouse the unused nil rate band of the first spouse to die can be carried forward to the estate of the surviving spouse which currently provides a combined allowance of £650,000.00.
For deaths after 6 April 2017 the residence nil rate band (RNRB) will potentially be available in addition to the NRB and takes the form of an extra amount that can be offset against the value of property (land and buildings) that has at some point been occupied as a residence.
The additional allowance will be available where property is closely inherited on or after 6 April 2017 and this will usually occur on the death of the owner. The RNRB will be phased in from 6 April 2017 up until 6 April 2020. For the tax year 2017/18 the additional allowance will be worth £100,000.00 per individual and this will rise to £175,000.00 for the tax year 2020/21 and from 6 April 2021 the RNRB will then increase in line with the Consumer Price Index.
There is also provision to cover the situation where a deceased has downsized to a less valuable residence or has ceased to own a residence. In these circumstances the allowance will still be available as long as the deceased left a smaller residence or assets of equivalent value to direct descendants. The RNRB would be reduced for £1.00 for every £2.00 that the net estate of the deceased exceeds £2m. As with the NRB any RNRB which is not used on the first death can be transferred in full to the estate of the surviving spouse unless that estate exceeds the taper threshold (£2m).
The new RNRB could therefore potentially provide a married couple with a combined Inheritance Tax allowance of £1m on the death of the surviving spouse after 6 April 2020 however it is to be noted that the provisions introducing the new allowance are very complex and the allowance is closely targeted to homes and lineal descendants. It is important for individuals to review their current Wills to ensure that they comply with new RNRB provisions and do not fall down on any of the criteria that would entitle them to the new allowance.
If you wish to discuss this in detail please contact Matthew Healey on 01455 610747.