It is a brave Conservative Chancellor who tinkers with Inheritance Tax, or who even speaks the words out loud, but imminent new rules are set to lift millions of family homes out of the reach of Inheritance Tax entirely – with some important caveats.
The new regime will take effect within weeks and it is a major shift that anyone with an estate to pass on to their family should look at carefully.
Currently set at 40 percent, Inheritance Tax is levied on everything that is left by someone to a beneficiary – whether this is cash, property or possessions.
At the moment, you have no Inheritance Tax to pay if either:
- The value of your estate is less than £325,000
- You leave everything to your spouse or civil partner, or to a charity or a community amateur sports club.
The 2017/18 tax year, which begins on April 6, will see the introduction of a new home allowance or residence nil rate band (RNRB).
Under these new rules an estate will be entitled to this RNRB if:
- The person dies on or after 6th April, 2017
- They own a home or a share of a home with a value of less than £2 million
- Their direct descendants – children, step-children, adopted children or grandchildren – inherit the home, or a share of it
An estate will also qualify as RNRB if the owner has downsized to a less valuable property, or if they have sold or gifted the home after 7th July 2015, or if they have moved into rented accommodation.
The maximum amount of the RNRB will go up yearly from £100,000 in 2017/18 to £175,000 in 2020/21.
This new allowance is in addition to the existing nil rate threshold which currently sits at £325,000, so those who are eligible will eventually be able to pass on estates valued up to £500,000, tax free.
Also , both married couples and civil partners are treated as individuals, so each is allowed to pass on their full allowance – so a couple can pass on estates worth up to £1 million to their direct descendants, including a family home, as long as this family home the main property.
Not everyone will benefit, of course. Buy to let and second homes will be added to the total size of the estate, as normal.
For estates valued at more than £2 million, the RNRB – and any transferred RNRB – will be gradually tapered. And RNIB will not be available to those without children, or to some business owners.
And it may very well be the case that existing wills, which provided tax-planning solutions for earlier circumstances are now redundant so they should be carefully reviewed.
Business owners need to look at this very carefully too. Businesses can be passed down to family members free from Inheritance Tax because they qualify for Business Property Relief. However, even though this is the case, its value will be included in the value of your estate under this new RNRB system, so this may push the value of your estate above the £2 million threshold.
The new regime is complex and it does come with some small print that needs to be negotiated carefully, so it is vital that you seek professional advice regarding your own finical affairs and provisions in light of these new rules.