How do the new InheritanceTax thresholds work for me?

We are two years on from the initial announcements that the inheritance tax threshold would be increased and finally the new residence nil rate band has been introduced. So, has the inheritance tax allowance been increased to £1m as headlines at the time suggested and, if so, how do you qualify?

It is in fact the case that the nil rate band amount on death will actually remain at its existing rate, but a new residence nil rate band has been introduced for certain couples.

All individuals have a nil rate band tax allowance and this is currently £325,000 per person. The nil rate band allowance applies to any assets and is transferrable between married couples. This means that, between them, a married couple will have a basic threshold of £650,000.

The new residence nil rate band allowance that was introduced in 2017 is currently £100,000 per person. It is due to increase to £125,000 in 2018/19, £150,000 in 2019/20 and finally £175,000 in 2020/2021. This, coupled with the nil rate band of £325,000, means that an individual threshold could be as much as £500,000 and the new joint threshold for some married couples will be £1m by 2021.  But who actually qualifies and how does the new allowance work?

  1. If a person dies owning a residence at the date of their death and they are passing that residence to their direct descendants, such as to children or grandchildren, they will benefit from the new allowance
  2. If you leave your house to anyone other than direct descendants, or if you do not have direct descendants, you will not qualify
  3. The additional allowance can only be used in respect of one property, which has at some point been a residence of the person who has died. Only the value of the residence will be taken into account for the allowance
  4. The allowance cannot be used on other assets
  5. If the first spouse does not use their allowance it is transferable in the same way as the normal nil rate band. If they could not use their allowance because they died before it existed, a double allowance will be available provided that the second spouse owned a property at the date of death
  6. If an estate is worth more than £2m the new allowance will be reduced so that by £2.2m the new allowance will be lost completely

It is also important to consider whether the terms of an existing Will are compatible with the new residence nil rate band and to weigh up the tax planning against the safeguarding of assets in an individual situation. There are also exceptions to the general rules in cases where the deceased may have downsized or sold property to move into residential care. This is, therefore, an important time for clients to review their Wills with their legal advisors to be made aware of the exceptions and to enable them to keep the relevant records going forward.

Donna Bothamley is the Head of the Wills and Probate team at Blythe Liggins Solicitors based in Leamington Spa, Warwickshire. As well as being a member of Solicitors for the Elderly, Donna is a member of the Society of Trust and Estate Practitioners. Donna guides clients through complex legal questions, but with understanding of the emotions that can be involved.
Donna Bothamley dmb@blytheliggins.co.uk 
01926 884763