This tax year has seen a change for Inheritance Tax. If a person dies after 6 April 2018 and their estate is above the usual Inheritance Tax nil rate band threshold of £325,000, their estate could be entitled to an additional nil rate band of £125,000. This additional nil rate band is also known as the residence nil rate band, and it has increased from £100,000 from last year.
What is the residence nil rate band?
The residence nil rate band will help reduce your Inheritance Tax liability if your estate is more than the nil rate band, provided that your interest in your residential home has been left to one or more direct descendants in your Will.
Although this condition applies to your home, the relief applies to the whole of your taxable estate, not just your home.
What’s even better, any unused residence nil rate band can be transferred to your spouse’s estate upon their passing.
For example, let’s say John dies during this tax year leaving behind his wife and two children. He holds the family home in his sole name and it’s worth £350,000. The rest of his assets, which are savings and investments, are worth around £100,000. Under John’s Will, his property will pass to his children, and the rest of his assets will pass to his wife.
The £100,000 worth of assets passing to his wife attract spousal exemption. This means no tax to pay here.
In terms of the property passing to his children, we can apply the nil rate band of £325,000 first, meaning there is £25,000 that is potentially taxable. Without the residence nil rate band, Inheritance Tax would be charged on the £25,000 at 40% - a huge tax liability of £10,000!
Luckily, by leaving the property to his children, John’s estate will benefit from the additional £125,000 nil rate band. His estate will therefore have no tax to pay.
The unused £100,000 of the residence nil rate band will also be transferred to his wife’s estate upon her passing.
What should you do now?
Review your Will
If you have already made your Will, it’s worth reviewing it, as it has been drafted before this recent change in Inheritance Tax implications.
If you haven’t yet made a Will, you should do so! You could benefit from this new Inheritance Tax change, saving your loved ones thousands of pounds of their inheritance.
Book an advice appointment
At Stephensons, we have a specialist team dedicated to providing Inheritance Tax efficient advice! Whether you have a Will or not, it’s worth booking an appointment with us to make sure you aren’t missing out on this updated allowance.
If you would like to discuss your estate planning with us, call us now on 01616 966 229.
By Ayesha Khan, Wills and Probate team