INSIGHT: Are You losing An Inheritance Tax Allowance On Your Home?

Posted on July 14, 2016

As Government uncertainty prevails and we now look to Theresa May to settle the ship, the old adage there is nothing as sure as ‘death and taxes’ prevails and with that in mind during this period of insecurity inheritance issues and estate planning are at the forefront of our minds.

A previous budget announced that the Government will next April phase in a new residence nil-rate band when a residence is passed down directly to a descendant on death - descendant defined as children, stepchildren, foster children, adopted children, grandchildren and great grandchildren.

As widely known the current nil rate band available on death for an individual is £325,000, taken to £650,000 for a married couple if unused and this is expected to remain unchanged until at least 2021.

For deaths in the 2017-2018 tax year the maximum additional residence nil rate band will be £100,000, increasing £25,000 each year rising to a maximum £175,000 in 2020-2021.

To protect those people who want to downsize to a smaller property from the large family home, reduce the burden of Inheritance Tax and make it easy pass on the family home without taxes, it is proposed that if the individual dies after 6th April 2017 and the downsizing occurred after July 8 2015 they will still enjoy the benefits of the residence nil rate band based on the higher value of property and it will be transferable on death between spouses.

For a couple this could result in a joint total nil rate band of £1m through careful planning and forethought in their Will.

£650,000 nil rate band + £350,000 residence nil rate band

For instance, a person may pass away during tax year 2017/18 and gift 50% of the family home to their children directly in their Will. The residence nil rate band (RNRB) will allow £100,000 to be deducted from the value of their 50% share when calculating their estate for IHT purposes. It will be reduced if the value of the property is less than the maximum for a particular year.

Similarly, if a person dies in 2020/21 (when the RNRB will be £175,000) and they leave their half of the property to their children, but the half share is worth £140,000, there would be £35,000 of the RNRB unused which could be transferred to a surviving spouse’s own estate though on their later death.

“As a solicitor I would always advise clients to review their Will regularly for family changes, but in this case to also check if they’ve left a share of your main residence into certain types of trust. This could stop the residence rate applying. Similarly, it’s important to plan your Will, if you’ve not got one already, to consider leaving your residence to a descendent,” said Daniel Prince, Private Client Partner.

“Brexit has thrown up many questions, but the perennial theme I come across in every Will and Trust is clients wanting to protect wealth accumulated and make sure it is passed on according to their wishes and the only way to do this is to make a valid Will,” added Daniel.

“It’s important to review how you own your home. Some people could miss out on this allowance if their home is owned as ‘joint tenants‘ as the property would pass automatically to the surviving joint owner on death. This would prevent a share in the property being left in a Will.”

Pearson Solicitors and Financial Advisers have both Private Client Solicitors and financial professionals to help steer clients through the inheritance minefield, call Daniel Prince or Financial Services Partner Richard Eastwood on 0161 785 3500.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.