With more and more families falling into the Inheritance Tax trap, it’s important to remember that the Government’s plans to alleviate the burden are just around the corner.
On 6 April 2017, the government will introduce an additional residence nil-rate band (RNRB) of £100,000 per person.
This will be added on top of your £325,000 tax-free threshold. And much like your current allowance, it can be rolled over to your husband, wife, or civil partner upon your death.
The RNRB will be increased by £25,000 over the next three years, before eventually reaching £175,000 in 2020. This effectively means that a couple (excluding cohabitees) can pass down up to £1 million tax-free to their children.
However, unlike the current threshold – where it can be used across the entirety of your estate – the RNRB can only be used against the value of your family home (the one you currently live in). Buy-to-let properties are not included either.
Furthermore, it can only be used if your family home is being passed down to direct heirs – that is, your adopted, step, and biological children or grandchildren.
If you’ve recently sold your family home, whether to move into a smaller house, rented accommodation, or a nursing home, it is possible to protect your RNRB. You should contact us for more information on this matter.
In addition, for every £2 you pass down to your children over £2 million, you will lose £1 of your allowance. This means that an estate owned by a couple valued at more than £2.4 million will not receive the new allowance.
Moving forward, you should be thinking about revising your will (if you already have one), or crafting your first one.
For example, putting a share of your house into a trust before the introduction of the RNRB would have been a tax-effective strategy, but as a trust does not count as a direct heir, it will not benefit from the tax benefits of the RNRB.
Ultimately, if you are unsure of how you can best utilise IHT, please seek advice.