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Q: I recall a £1m IHT exemption was announced for married couples. I am keen to put my house in order and with my estate valued at just over that amount what can I do to take advantage of this?
A: As with most tax related matters the headline announcement belies a degree of complexity within the legislation. Importantly, the £1m is the maximum value of the estate before IHT is payable, normally at 40%. This is made up of two existing nil rate bands of £325,000 and a new residence nil rate band (RNRB) of £175,000 per person; giving a total of £1m per couple. The RNRB is being phased in from April 2017. Initially the band is £100,000 per person, rising in £25k increments to £175k from April 2020. If not used on first death the £325,000 band and the £175,000 band can be transferred to the surviving spouse.
The RNRB relates specifically to an interest in one residential property and where there is more than one residence executors can nominate which one should qualify. A further requirement is that the house is passed to a direct descendant and this definition has been widened to include stepchildren, adopted and foster children. Any surplus RNRB cannot be transferred to other assets though there are provisions to deal with downsizing to a less valuable home. To avoid criticism of favouring the wealthy, the legislation includes a tapered withdrawal of the RNRB for an estate valued at over £2m. This mechanism withdraws £1 of relief for every £2 over the threshold. This article is for the purposes of information only and should not be interpreted as investment advice.