Are you aware the Inheritance Tax laws changed on April 6th 2017? Are you one of the many who now believe they have £1 million before they pay any inheritance tax? You are most probably wrong! Do you have children / grandchildren (direct lineal descendants)? Are you married? Do you have a property that you live in or have lived in (a qualifying residential interest)? How much debt do you still have on your property? All these factors contribute to whether you will get the extra Residence Nil Rate band. Confused yet?
As an attempt to satisfy the promise of £1 million inheritance tax-free, the new Residence Nil Rate band was introduced in April 2017. Experience to date shows that many people are under the misconception that everyone now has £1 million and it really is not that simple.
Everyone has their own tax-free allowance of £325k (‘ordinary nil rate band’) which has been fixed until April 2026. As the survivor of a married couple, you will benefit from your spouse’s £325k (‘transferable nil rate band’), providing they haven’t used any of it up at their death or with lifetime gifting. So, when you have both died, your family will benefit from £650k before tax is paid.
Each individual now has an additional £175k (‘residence nil rate band’), again fixed until April 2026, to pass on to their family, inheritance tax-free, but they must pass it to direct lineal descendants: children, grandchildren, adopted children, stepchildren, foster children, spouses of deceased children provided they have not remarried. What if you do not have any direct lineal descendants? You will not qualify for this extra allowance. Unfair?
The additional allowance must be in the form of property (or if you have downsized since 8 July 2015) that you live in or have lived in (i.e. excluding buy-to-lets, unless you had previously lived in it). That property can pass to your spouse at your death. Then, at your spouse’s death, your estate will get both your allowance and your spouse’s allowance (i.e. a transferable residence nil rate band). This will mean that as a married couple you will have £1M before inheritance tax is payable; the 2 ordinary nil rate bands of £650k plus the 2 Residence nil rate bands of £250k. If you are unmarried, beware! If you pass your property to your partner at death and then on to your children, you will lose one allowance. Unfair?
The value in the property is also a consideration. The value is the net value i.e. minus your mortgage. So you may own a £350k property as a married couple but you have a £250k mortgage. Hence only £100k (between you) rather than £350k will qualify for the additional allowance.
Trust planning within Wills is common and very useful. However, beware, some trusts will disqualify you from the new allowance. Specialised estate planning is required to ensure you still retain the benefit from trust planning as well as the additional tax allowance.
As you can see it’s a minefield. So, don’t assume the inheritance tax free allowance you think you will get and seek proper legal advice.