A week has passed since the budget was announced and one of the changes we anticipated is the increase of the nil rate band to take into account the value of properties – but what does the fine print mean?
Inheritance tax is payable on the value of an estate over the applicable nil rate band at 40%. The nil rate band is the amount that can pass free of inheritance tax and is currently £325,000 for each individual. The nil rate band is set to stay at £325,000 until April 2021.
For a married couple or civil partnership (for ease of reference ‘married couples or civil partnerships’ will be referred to as ‘married couples’ in the rest of this blog), any unused percentage of the nil rate band on the death of the first spouse can be transferred and used against the estate of the surviving spouse provided a claim is made within two years of the surviving spouses’ death. Effectively, this would allow a married couple to have a combined estate of £650,000 before inheritance tax is levied.
On 8 July 2015, it was announced that the inheritance tax threshold would rise to £1 million for married couples with estates including property. The measure would allow individuals to pass on their estates (to include their main residence) to direct descendants and will be done by introducing an additional main residence nil rate band which will be phased in from 6 April 2017 as follows:
- £100,000 in 2017-18;
- £125,000 in 2018-19;
- £150,000 in 2019-20;
- £175,000 in 2020-21;
- From 2021-22 the main residence nil rate band will increase in line with Consumer Prices Index;
- For estates with a net value of more than £2 million, the additional main residence nil rate band will be reduced by £1 for every £2 over the £2 million.
How will my residence qualify?
- The qualifying residential interest will be limited to one residential property but this can be nominated by the personal representatives if there is more than one property. However, it must have been a place of residence for the deceased otherwise it will not qualify (i.e. a buy to let);
- The value of the additional main residence nil rate band will be the lower of the maximum amount of the band (as set out above) or the net value of the interest in the residential property (i.e. less any mortgages or liabilities);
- The property must pass to a direct descendant (this includes a step-child, adopted child or foster child of the deceased) and their lineal descendants;
- For a married couple, any unused additional main residence nil rate band can also be transferred to be used against the estate of the surviving spouse in the same way as the original nil rate band;
- In the event of a person downsizing after 8 July 2015, provided that there is still a property at the date of death, the surplus value is not lost and can be applied against other assets being passed to a direct descendant subject to point ‘2’ above. More information about this will be published in September 2015 in readiness for the Finance Act 2016.
The additional main residence nil rate band will benefit those with more expensive properties however, the inheritance tax allowance of £1 million will only be available to married couples in 2020-21.
For more information on inheritance tax and estate planning, please contact our Wills & Wealth Planning team on 01625 442148.