Wills, Probate, Tax & Trusts

Inheritance Tax Changes from April 2017

March 31, 2017

In July 2015, the newly elected Conservative Government announced the introduction of a new inheritance tax (IHT) allowance – the Residence Nil-Rate Band – which would allow married couples and civil partners to leave estates of up to £1 million free of IHT. The changes take effect in April this year but individuals without an up-to-date Will or who fail to take advice may lose out.

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The current rules

When someone dies, IHT is charged at a rate of 40% on the value of their assets which exceed the IHT Nil-Rate Band currently £325,000. No IHT is charged when a person leaves assets to their spouse, civil partner or to charity. Spouses and civil partners may transfer unused Nil-Rate Band allowances to the survivor of them, so that when the survivor dies he or she may leave assets of up to £650,000 free of IHT.

The new Residence Nil-Rate Band

As from 6th April 2017, an individual will have an additional allowance of £100,000 if they leave their “residence” to their “lineal descendants”. The value of the Residence Nil-Rate Band will increase by £25,000 over each of the next three tax years to £175,000 by 6th April 2020.

The allowance is limited to the value of a residence so a couple with a property worth less than £200,000 (or £350,000 post 6th April 2020) will not be able to claim the full allowance.

As with the Nil-Rate Band, spouses and civil partners may inherit each other’s unused Residence Nil-Rate Bands. This means that post 6th April 2020, a couple with assets of less than £1 million may not be subject to IHT on their estate at all.

How can I benefit from the new allowance?

The Residence Nil-Rate Band can be claimed if all of the following apply:

  • you die on or after 6th April 2017;
  • you leave an estate valued at less than £2 million;
  • you own a property which you occupy as your residence (i.e. this excludes commercial property or a buy to let which has never been your residence); and
  • you leave your residence to “lineal descendants” (broadly children and grandchildren) or to certain qualifying trusts.

I am the surviving spouse – can I claim a transferable Residence Nil-Rate Band?

If your spouse of civil partner died before the introduction of the new rules you may still be able to claim the Residence Nil-Rate Band. However, much will depend on the provisions of your spouse or civil partner’s Will.

I no longer own a “residence” – am I eligible for the allowance?

Potentially, yes. There are complex rules which apply to previously owned residences. If you no longer own a “residence” but owned one in the past then you should take legal advice.

What if I downsize?

The new rules allow individuals to preserve their full Residence Nil-Rate Band if they downsize to a less valuable property. The rules are complicated and you should take legal advice if you have or are intending to downsize.

My estate exceeds £2 million – what can I do?

You should review your Will and seek advice to see if there are ways in which you can arrange your affairs to take advantage of the new Residence Nil-Rate Band.

My Will incorporates a trust - do I need to change it?

Residential property passing to discretionary trusts will not qualify for the Residence Nil-Rate Band. If your Will incorporates a discretionary trust you will need to seek professional advice and, possibly, revise your Will.

What should I do now?

To ensure that you maximise the tax-saving effect of the Residence Nil-Rate Band we strongly recommend that you review your Will (or make a Will if you don’t have one already). The conditions for claiming the Residence Nil-Rate Band are complicated and you should seek expert advice to ensure that you and your family can benefit from the changes.

Burroughs Day Solicitors offer a free Will review. We also offer fixed price ‘Ask the Legal Expert’ sessions, as well as fixed fee advice specifically relating to the Residence Nil-Rate Band changes. Get in touch with our specialist Wills, Probate, Tax & Trusts team for more information. Call Bart on 0117 930 7548. 

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