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A New Inheritance Tax Allowance

View profile for Guy Birtwistle
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As you may be aware, individuals currently have an inheritance tax allowance of £325,000 and an unused allowance can be transferred to the surviving spouse.

Legislation was introduced in the Summer Finance Bill 2015, published in July, to provide for an additional inheritance tax free sum called “the residence nil-rate allowance”.

The new residence nil-rate allowance will be available for people who die on or after 6 April 2017 owning a home or an interest in their home which is inherited by their lineal descendants (children, grandchildren etc) on their death. Anyone dying before that date misses out. Estates of deceased persons worth more than £2m also miss out.

The value of the residence nil-rate amount will be £100,000 in 2017/18, rising by £25,000 each tax year until it reaches £175,000 in 2020/21. It will then increase in line with the consumer prices index (CPI) from 2021/22 onwards.

Any unused residence nil-rate allowance can be carried forward to a surviving spouse or civil partner thereby doubling the residence nil-rate amount. An allowance is unused if a person dies before 6 April 2017, or dies without owning their home or a share in it or which they don’t leave to their lineal descendants.

Note that the definition of a child in the proposed legislation is very wide and includes step-children, foster children and natural children who have been adopted by a third party.

Property transferred to a trust on death can be treated as inherited, but only if the property within the trust is held for the immediate benefit of the lineal descendant. A discretionary trust is not good enough, even if all the beneficiaries are lineal descendants. Note that a typical grandparental Will trust along the lines of ‘to my grandchildren contingent on reaching age …’ will not work.

The additional NRB will also be available when a person downsizes or ceases to own a home on or after 8 July 2015, provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants.

If your estate is worth more than £325,000, or £650,000 for a surviving spouse, take a look at your Will – it may need to be altered to ensure you can benefit from the residence nil-rate allowance.