The Main Residence Nil Rate Band
From 6 April 2017, a new allowance may reduce the amount of tax due when leaving your estate, including your family home, to your descendants.
The allowance starts at £100,000 for 2017/18 and will increase during the subsequent three tax years by £25,000 per year until it reaches £175,000 in the 2020/21 tax year. When added to the current nil rate tax band of £325,000 per individual, this means an allowance per individual of £500,000 and £1 million for married couples and civil partners for their descendants before any inheritance tax is payable. Both these tax allowances can be passed onto the surviving spouse or civil partner.
This new allowance supports a Government aim to make it easier to pass the family home onto children, grandchildren, adoptive and step children and may have a significant impact on inheritance tax planning strategies.
However, in order for your descendants to benefit, there are some important points to be considered:
• The qualifying property needs to have been your main residence at some point during your lifetime. You do not have to be living in the property when you die.
• If you own more than one qualifying property, your personal representatives can nominate which one should be used.
• You must leave the property to a lineal descendant. In addition to children and grandchildren and their spouses, this includes step-children, adopted and fostered children.
• It does not include your spouse, you can only transfer the allowance to them.
• The Main Residence Nil Rate Tax Band can be transferred to a surviving spouse or civil partner even if the first to die did not own a property.
• The total value of your estate should not exceed £2 million. In this case the allowance is tapered down. It is reduced for every £2 which exceeds this limit.
• If you die in the 2017/18 tax year with an estate of more than £2.2 million then your residence allowance will be reduced to £0.
Use of Trusts
Care should be taken if your residence is to be placed in trust after your death. The legislation permits gifts into certain types of trust. This includes life interest trusts and those which benefit from preferential inheritance tax treatment. It does not include discretionary trusts even where the only people who can benefit fall within the definition of ‘lineal descendant’.
Your descendants can still qualify for the new main residence allowance if you downsize or sell up to move into care, provided you did so after 8 July 2015. It may be possible to use the main residence allowance to reduce inheritance tax on assets of any kind.
Strict requirements may mean the main residence allowance is of limited use, especially if your estate is worth more than £2 million or you don’t want to leave your main residence to a lineal descendant. Each individual case will be different. We are very happy to answer any queries you may have and if this applies to you, we will discuss this at your next review meeting.
This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.