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Changes to the Nil Rate Band

09/12/2015
Budget

The 2015 Summer Budget brought about many tax changes, and the one proposal which really hit the headlines was the ‘residence nil rate band’.

The current nil rate band for inheritance tax (IHT) is to remain fixed at £325,000 per individual until 5 April 2021. The residence nil rate band will come in from 6 April 2017, starting at a £100,000 additional allowance per person and increasing every year by £25,000 to a maximum of £175,000 from 6 April 2020. This will increase in line with the Consumer Prices Index thereafter.

Married couples can leave the entirety of their estate to their spouse free of IHT. On the second death, the first to die’s nil rate band transfers to the surviving spouse, leaving them with an IHT threshold of £650,000. The residence nil rate band will also be transferable between spouses which means that as of 6 April 2020 a surviving spouse could potentially leave £1M free of IHT. However, the devil is in the detail, and the new rules are not as clear cut as some of the media may have suggested.

There are certain conditions that will have to be met in order to qualify for the residence nil rate band and the key points to note are as follows:

  • For the residence to qualify for the additional nil rate band, it must have been a person’s residence at some stage during the period of ownership. For those who have more than one ‘residence’ in their estate, they or their personal representatives may nominate which residential property qualifies.
  • The property must be inherited by one or more lineal descendants of the deceased. This includes a step-child, adopted child or foster child. Where an individual does not have any descendants, they will not be able to benefit from the residence nil rate band, a point labelled as controversial.
  • For those whose estates have a net value of over £2M, there will be a tapered withdrawal of the residence nil rate band of £1 for every £2 over the £2M threshold. For those whose estates are over the threshold, further estate planning consideration is needed to reduce their taxable estates.

If a person downsizes or ceases to own a home there are proposals that the residence nil-rate band will be available where assets of an equivalent value, up to the value of the residence nil-rate band, pass on death to lineal descendants. The legislation is still at a draft stage and is expected to be introduced in the Finance Act 2016.

As the new rules are far from straight forward, those making new wills and updating existing ones will need to seek the correct guidance to ensure that they are able to benefit from the changes.

For more information please contact Louise Igoe on 01789 206156 or at louise.igoe@lodders.co.uk

Louise Igoe

Louise Igoe, Lodders Solicitors

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