Under the new inheritance tax rules, far more estates will pass free of inheritance tax post 5 April 2017. By 5 April 2021, some estates worth £1 million will pass free of inheritance tax. This is the good news, but is by far from the whole picture. In fact for many, and in particular the childless, the inheritance tax bill will in fact (with the effect of inflation) be higher post 5 April 2017.
The good news
First, the good news for those wishing to pass the value of the family home onto their children or grandchildren. For deaths from 6 April 2017, an additional inheritance tax free “residence nil rate band” will be available. This will begin at £100,000 in the tax year 2017/18 and will increase by £25,000 each tax year, reaching £175,000 by 2021. This “residence nil rate band” is available where the deceased leaves a property (or the proceeds of sale of a property), in which they have lived at some point, to their direct descendents (children and their issue).
The residence nil rate band is available on top of the existing inheritance tax nil rate band of £325,000, so that in 2020/21 an individual will potentially be able to leave £500,000 free of inheritance tax. As is now the case with the standard nil rate band, where the first of a married couple to die leaves their estate to their spouse, the inheritance nil rate band can effectively be “passed on” to the surviving spouse. The estate of the spouse who is second to die will therefore potentially have two nil rate bands (£325,000 x 2 = £650,000), plus two “residence nil rate band’s” (£175,000 x 2 = £350,000).
For those with a conventional family, and a modest home and savings (and subject to the rate of house price increases in the coming years) it is therefore likely that no inheritance tax will be payable on their estate.
No disincentive to downsize
As expected, the rules will be designed to ensure that the elderly are not encouraged to retain family homes they would otherwise have sold. Where the deceased has downscaled or sold up, it will still be possible to pass on the proceeds of the family home. The rules provide only that the deceased must have lived in the property in question at some point, and that assets of an equivalent value are passed on to direct descendents.
Estates worth more than £2 million
The additional residence nil rate band will not be available to the most valuable estates. In particular, for estates worth more than £2.7 million, no residence nil rate band can be claimed. The amount of residence nil rate band available will be tapered for estates worth more than £2 million.
Freeze of the basic nil rate band
Many conventional families will clearly benefit from the additional residence nil rate band. However, the small print in fact spells bad news for some estates.
The nil rate band of £325,000 is now frozen to at least April 2021. This means that for the unmarried, and for those who leave no children or grandchildren, the inheritance tax free band will continue to be eroded by inflation. A single person owning property in London, for example, is highly likely to leave an estate subject to inheritance tax. The number of single and childless persons of even modest means who will fall within the inheritance tax bracket will inevitably continue to increase. The inheritance tax changes are not therefore in reality good news for all.
The AMD Solicitors private client department includes full members of ‘STEP’, the leading provider of specialist accreditation in this field. For advice on inheritance tax, administration of deceased estates, wills, lasting powers of attorney and all private client issues contact Shelley Faulkner, Brenda Smyth or another member of the team on 0117 9621205, email firstname.lastname@example.org, or call into one of our four Bristol Offices.
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