Homes with a built-in tax allowance
EVERY INDIVIDUAL has an inheritance tax (IHT) nil-rate band. This is the amount which can pass tax-free on an individual’s death (in addition to any available IHT exemptions or reliefs). The IHT nil-rate band will remain at £325,000 until the end of the 2020/2021 tax year. If the IHT nil-rate band of a spouse or civil partner is not used on his or her death (for instance, because all of the spouse’s or civil partner’s assets pass to the surviving spouse or civil partner), it can be transferred for use on the later death of the surviving spouse or civil partner.
Since April 2017, individuals who on their death leave their main residence to their lineal descendants, including children, stepchildren and adopted children and grandchildren, have had the benefit of an additional IHT nil-rate band. This is known as the residence nil-rate band.
The additional tax-free amount started at £100,000 for the 2017/2018 tax year and will increase by £25,000 a year until 2020/2021 when it reaches £175,000, after which it will rise in line with the consumer prices index. Any unused residence nil-rate band can be passed to the surviving spouse for use on their death. By 2021 this will allow a couple to pass up to £1 million tax-free to their descendants.
The new rules also allow individuals to claim the residence nil-rate band if they had owned a main residence until July 8, 2015 but no longer own it at their death.
Anyone who has downsized or moved into a care home and, as a result, does not own as valuable a main residence at their death as they had previously owned, will still be able to benefit from the allowance.
The residence nil-rate band will be available to reduce the IHT payable on other assets in the estate of equivalent value to the residence nil-rate band. There are, however, some restrictions to look out for. The benefit starts to taper downwards on estates with a net value of more than £2 million and is totally eliminated once the value of the estate has reached £2.7 million. The additional allowance is not available on buy-tolet properties nor can it used for properties left in a discretionary trust on death, or lifetime transfers into a trust.
This is a welcome announcement for many home owners, ensuring married couples or civil partners can pass on assets up to £1 million to their families on death without any IHT charge. The restriction for estates over £2 million means it is aimed at middle-income homeowners, rather than the ultrawealthy.
Carolyn Addleman is director of legacies at KKL Executor & Trustee Co
0800 358 3587
Good news for middleincome home owners’