New inheritance tax rules

The current rules for inheritance tax are that inheritance tax is charged at 40 per cent on the assets of those who die that are above the main threshold of £325,000 for a single person. This doubles up to £650,000 for married couples and civil partners if they pass on their assets on death to their surviving spouse and have not used any of their allowance themselves. This is because spouses can transfer assets to each other without being liable for inheritance tax. Any unused allowance from the first spouse to die is then taken on by the surviving spouse.

From 6 April 2017 an additional “residence nil rate band” of £100,000 per person will be introduced which will effectively take the threshold at which inheritance tax becomes payable to £850,000 for family beneficiaries. The additional allowance will only apply to wealth tied up in your main residence and it can only be left to direct descendants. The additional allowance will increase to £125,000 in the tax year 2018/2019; to £150,000 in the tax year 2019/2020 and to £175,000 in 2020/2021.

To qualify for the additional residence nil rate band you must die after 6 April 2017; own a residence or a share of one; and pass it to your direct descendants. Direct descendants are children, grandchildren, step, adopted or foster children. A gift for example to nieces or nephews would not qualify for the additional relief.

A buy to let property will not qualify for the additional relief.

To make full use of the two residence nil rate bands once they are in full effect in 2020 the surviving spouse or civil partner must have a residence worth at least £350,000. Unmarried couples do not have the right to pass on nil rate bands and so they only have one allowance of £325,000 plus one residence nil rate band allowance of £175,000 by 2020.

A gift of your residence into a trust may not qualify for the relief. It depends upon the wording of the trust.

If you need to sell your home before you die then the additional residence nil rate band may still be available. It may be available if you downsize or cease to own a home on or after 8 July 2015. You will need to keep evidence of the sale of the property and evidence that it was your main home.

These rules are designed to help normal families pay less tax. Consequently estates that exceed £2 million will see the main residence nil rate band reduced by £1 for every £2 that the estate is valued over £2 million. When an estate exceeds £2.7 million in total the residence nil rate bands will be lost altogether.

You should review your wills periodically anyway but it is especially important that you review your wills now in order to make sure that you can benefit from the additional residence nil rate band. Contact Dixon Stewart to review your will or e mail