The Daily Mail reported in July that the government’s collection of inheritance tax over the previous year broke the £5 billion mark for the first time. It alleged that more families were being pulled into the inheritance tax net as the older generation had seen the value of their homes substantially increase.
By far the biggest element in most people’s estates is the home that they own and for many years inheritance tax limits did not keep up with the increase in house prices. On average, residential property accounts for a third of inheritance tax bills. It is not possible for people whose wealth is tied up in the home in which they live to give it away whilst they are alive and reduce their inheritance tax liability. This is because the Inland Revenue treat such a gift as a “gift with reservation of benefit” and the value of the home will be included in a deceased’s estate for inheritance tax purposes even though they purported to make a gift.
Inheritance tax is a tax on the estate of a person who has died. An estate is made up of various assets which can include a home, other property, money and possessions. Inheritance tax is payable when an estate’s value exceeds a person’s inheritance tax allowance – called a nil rate band. Inheritance tax is paid at a rate of 40% on the value of the estate that exceeds the nil rate band. A person’s allowance will never be lower than their nil rate band (currently £325,000) but their inheritance tax threshold can be increased through the use of additional nil rate bands or exemptions.
An additional residential nil rate band was introduced in April 2017. This is an additional allowance for property that can be combined with a person’s own £325,000 nil rate band for inheritance tax to increase their inheritance tax threshold. The current residential nil rate band is £125,000.
The residential nil rate band can only be used when the property is being inherited by the deceased’s direct descendants (children and grandchildren) either via a will or on intestacy. .
The residential nil rate band can be transferred to a spouse or a civil partner if there is an unused amount of allowance available. If a deceased left their entire estate to their spouse or civil partner then their residential nil rate band will be unused and can be claimed by the surviving spouse or civil partner on their death in addition to their own residential nil rate band.
You do not receive the residential nil rate band or the transferred residential nil rate band automatically. It is necessary to claim the relief from inheritance tax on death by the submission of an additional form or forms to the Inland Revenue.
The rules are complicated and Dixon Stewart can help to ensure that you receive the correct allowances.