What are the changes?
Currently (in the 2016/17 tax year) everyone is allowed to leave an estate valued at up to a £325,000 without your beneficiaries paying tax on it. Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity). So for example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in tax – if you’re not leaving anything to charity.
Following an announcement by the former Chancellor George Osborne last year parents or grandparents can pass on an estate that includes a private residence worth up to £1m (£500,000 for singles) without paying inheritance tax. This will be phased in gradually between 2017 and 2020. Starting at £100,000 from April 2017, rising by £25,000 each year until it reaches £175,000 in 2020. This additional nil-rate band is known as the Residential Nil Rate Band
If your married or civil partner died prior to April 2017 and you can prove that they were originally co-owners of the property, your family might be able to an additional allowance up to the limit of £175,000 in respect of their share of the property.
Don’t get caught out – does your current Will factor in the changes?
- The new tax-free residence nil rate band will be introduced from 2017, however it is only valid on a private residence and where that residence is ‘closely inherited by a lineal descendant’. This includes children, step-children, adopted children, foster children, grandchildren and great grand-children.
- If you have to sell your property and move into a care home your family will still be able to claim the additional allowance in respect of any cash or investments that you own which were funded by the proceeds of sale of your home provided that your family can prove that the monies or investments are traceable to the net sale proceeds. You should therefore ensure that your financial records are kept in a safe place.
- In addition where an estate is worth £2 million or more the new allowance is withdrawn by £1 for every £2 that the estate exceeds the value of £2m. So for a couple has an estate valued at £2,350,000 or more there will be no entitlement whatsoever to the additional allowance.
- The property must be inherited under a Will or under intestacy if no will has been made. It only applies on death and cannot be retrospectively applied to a gift which becomes chargeable to tax because the deceased has not survived for seven years.
- Be aware that a beneficiary could lose out if the property is left by Will to a discretionary trust. It can work for other types of trust but this will depend on the specific type of trust and the relationship of the person making the Will and the recipient of the property.
- Certain types of Wills which will lose part or all of the reliefs if they are not changed. For example:
- A Will which leaves everything to the surviving spouse/civil partner so that by the second death the estate is too large to benefit
- The use of discretionary trusts on the death of the survivor
- Substitution clauses in favour of grandchildren with an age contingency
- Properties owned jointly with a trust
If you need certainty about your entitlement to the new allowance, then please contact Colin Glass, Jane Beaven or Rohima Akhter in our Wealth Protection team on 01895 201700