In July 2015, a new inheritance tax allowance was introduced which applies to family homes. The Residence Nil Rate Band means that in future you may be able to pass on £1 million to your children or grandchildren tax free.
This allowance will be phased in from 2017/18 and will be in addition to the Standard Nil Rate Band which will remain at £325,000 until the end of the 2020/21 tax year.
As both these allowances will be fully transferrable to a spouse or civil partner on death, this will effectively mean that by 2021 couples may be able to pass on £1 million to their children and grandchildren tax-free.
However there are a number of conditions that you need to be aware of:
- The allowance will be phased in from 6 April 2017 and will apply to deaths on or after this date:
- It only applies to properties that you have lived in. Buy-to-let properties will not qualify.
- The allowance only applies when the property is left to your children, grandchildren and other direct descendants including step-children, adopted and fostered children.
- If your individual estate is worth more than £2 million, the allowance will be reduced by £1 for every £2 above this amount.
- If any part of the allowance is not used on your death it can be transferred to your spouse or civil partner.
- If your estate includes more than one property, you can nominate which one should qualify for the allowance. You cannot carry over any unused allowance to another residence
- Relief will apply to allow for downsizing and for those who ceased to own a residence on or after 8 July 2015.
Planning ahead is vital
As always when considering inheritance tax, forward planning is crucial. We recommend that clients regularly review their wills and consider whether they are making the most of the allowances available. Please contact Sue Stephens if you require any additional advice.