Guidance on the new residence nil rate band

Sally Johnson, solicitor in the Wills Trusts & Estates Department at Lees Solicitors discusses the new Residence Nil Rate Band which is due to be introduced in April 2017.

From meeting with clients there appears to be a lot of confusion regarding Inheritance Tax allowances and rates since the introduction of the new Residence Nil Rate Band was announced. The most common misconception appears to be that the individual Inheritance Tax allowance of £325,000 is being increased to £500,000, which is not necessarily correct. Individuals also appear to be concerned that they may lose the ability to claim the additional allowance is they need full time care in the future.

Sally has addressed 5 of the main concerns raised by clients.

Sally Johnson discusses make a will month

Sally Johnson at Lees Solicitors

  1. Will my individual Inheritance Tax allowance increase from April 2017?

No. The individual Inheritance Tax allowance of £325,000 is frozen until 2021. The new Residence Nil Rate Band is an allowance which can be claimed in addition to the individual Inheritance Tax allowance.

  1. Is everyone entitled to claim the new allowance?

No, not everyone will benefit from the new allowance. The Residence Nil Rate Band is only available where the main residence is passed to direct descendants which includes children; adopted children; step-child; grandchild or other lineal descendants. The list also includes the spouses of civil partners of a lineal descendant, including their widow, widower or surviving civil partner.

  1. How much will the new allowance be?

The Residence Nil Rate Band will be phased in over 4 years from April 2017. Initially the maximum allowance will be £100,000 increasing by £25,000 each year until 2020. At this point the maximum allowance will be £175,000. This will provide married couples and civil partners with the promised £1m Inheritance Tax allowance as the allowance is transferrable between married couples and civil partners.

It is important to note that the Residence Nil Rate Band does not mean your home is exempt for inheritance tax purposes.  The amount of the Residence Nil Rate Band an estate can claim will be the lower of;

(a)       the value of your home, or share inherited by direct descendants; or

(b)       the maximum Residence Nil Rate Band available. This will apply where the value exceeds the maximum allowance available.

  1. Can you lose the right to claim the allowance?

There are situations where the right to claim the Residence Nil Rate Band may be lost, for example, where a property has been placed in a Discretionary Trust as the property in these instances are not regarded as forming part of a person’s estate.

Also, individuals whose estates are greater than £2m may also lose the right to claim the Residence Nil Rate Band as there will be a tapered withdrawal of the allowance at a rate of £1 for every £2 over this threshold. Tapering can also reduce the amount which can be transferred to a surviving spouse or civil partner.

  1. What if I downsize or have sold my house due to being in full time care?

The family home does not need to be owned by you at your death to qualify as there is also the ability to claim an additional allowance, known as a ‘Downsizing Addition’. The Downsizing Addition can be claimed provided the home you disposed of was owned by you on or after 8 July 2015 and it would have qualified for the Residence Nil Rate Band had you retained it.

The amount which could be claimed under the Downsizing Addition will generally be equal to the Residence Nil Rate Band that has been lost due to the family home no longer being in the estate.

Due to the complexities involved in claiming the Residence Nil Rate Band and ensuring the ability to claim the additional allowance is lost Sally Johnson comments,

It is extremely important to keep Wills under review to cater for changing circumstances and to ensure changes in legislation do not adversely impact on your estate. Years ago it was common for individuals who were concerned about Inheritance Tax to incorporate Discretionary Trusts in their Wills. However, those individuals now run the risk of their estates losing the ability to claim the new Residence Nil Rate Band unless they take action now.

How we can help

Let Lees Solicitors make things a little easier for you and your family.  Contact our Wills, Trusts & Estates team to book an appointment or to chat through your requirements on 0800 387 927.

Lees Solicitors offer free safe storage of any will and can register your will on Certainty’s national wills database.

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