Changes to the Inheritance Tax threshold – will you be affected?

A significant change to inheritance tax rules comes into force this year which you need to be aware of. The new residence nil rate band allowance comes into effect on 6 April 2017.

If you are married with children (and/or grandchildren), own your own home and have assets above the nil rate band allowance (currently £325,000) then this change in the law could affect you.

What are the current inheritance tax rules?

Inheritance tax is a potential tax on your estate when you die. There is normally no inheritance tax to pay if the value of your net estate is below the nil rate band allowance (currently £325,000 applicable to every individual) or you leave the amount over £325,000 to your spouse/civil partner or to charity. Otherwise, unless an exemption or relief applies, which might attach to business assets and investments or agricultural property, the amount of your estate above this threshold tax is charged at 40 per cent (this is reduced to 36 per cent if you leave 10 per cent of your net estate to charity). Don’t forget that the value of some gifts during the seven years prior to death might be added to your estate for the purpose of working out the value to be charged to tax. Do refer to our information leaflet on Inheritance for more information about this.

What is changing?

A new additional nil rate band allowance is being introduced when a residence is passed on death to a direct descendant.  This is known as the residence nil rate band allowance and it is in addition to your normal nil rate band allowance (£325,000).  It is being introduced in stages:

  • £100,000 for deaths in tax year 2017 to 2018
  • £125,000 for deaths in tax year 2018 to 2019
  • £150,000 for deaths in tax year 2019 to 2020
  • £175,000 for deaths in tax year 2020 to 2021

The residence nil rate band allowance will increase in line with the Consumer Prices index from 2021.

So the effect is that by April 2020 you will have a nil rate band allowance of £325,000 plus a residence nil rate band allowance of £175,000, equating to an inheritance tax allowance of £500,000.  As with the nil rate band allowance any unused residence nil rate band allowance will be transferred to the surviving spouse/civil partner (by way of a percentage uplift in the survivor’s allowance). Therefore, if a couple leave their estates to each other, then the surviving spouse/civil partner would have an inheritance tax threshold of £1million (subject to the restrictions and conditions discussed below).

Please note however that to take full advantage of the residence nil rate threshold, your residence will have to be worth at least £175,000 for a single person or £350,000 for a couple.

The new rules are complex so you should seek specialist advice to ensure that you maximise the amount you are able to leave your family free of inheritance tax. To find out how the experts at Moore Thompson can help you, please contact us.