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Inheritance Tax and Your Home; The New Residence Nil-Rate Band

inheritence-taxDid you know that according to figures from HMRC in 2014/15 there were 5,600 estates in the South East which were required to pay Inheritance Tax? The value of the Inheritance Tax payable by these estates totalled a massive £1032 million.

However, the Government did review Inheritance Tax as set out in their Conservative election manifesto. As a result, the Residential Nil-Rate Band (RNRB) for Inheritance Tax (IHT) has been introduced from April this year.

How the Nil-Rate Band will be applied

Currently, there is a Nil-Rate Band of £325,000 for an individual or £650,000 for a married couple (when the second spouse passes away) where no Inheritance Tax is payable. Anything above this threshold is subject to tax at a rate of 40%. This tax is not payable if the estate passes to a spouse, civil partner or charity.

The Residence Nil-Rate Band or ‘home allowance’ can be used when a person’s home, which they have lived in at some stage, passes to a direct descendant. Direct descendants are children or grandchildren and include stepchildren as well as fostered or adopted children.

This means if a person passes away and leaves their home to their direct descendants then this extra Nil-Rate Band can be applied to reduce the liability to Inheritance Tax. Any unused additional Nil-Rate Band can also be passed to a surviving spouse or civil partner.

The Residence Nil-Rate would be applied as follows for a person who leaves a property worth £300,000 and other assets of £125,000 to their children in this tax year:

Additional threshold 2017/18 £100,000
Basic threshold 2017/2018 £325,000

Estate valued at £425,000
(house £300,000, assets £125,000)
Less additional threshold (£100,000)

Remainder of assets £325,000
Less basic threshold (£325,000)

Tax payable at 40% on £0

The Residence Nil-Rate band is £100,000 for the tax year 2017/18 and will increase over the next three years:

Tax year 2018/19 £125,000
Tax year 2019/2020 £150,000
Tax year 2020/2021 £175,000

The band will then increase in line with the Consumer Price Index each year.

If an estate is valued at over £2,000,000 then the Residence Nil-Rate band will be tapered. The withdrawal rate is £1 for every £2 over the threshold and so will not apply to estates in excess of £2,350,000.

Planning and free advice

This new Residence Nil-Rate band means with some careful planning you can leave more to those closest to you. Here at Flackwoods, we provide inheritance tax planning and fully believe these planning services are so important that we offer all our new clients 30 minutes free advice in our offices in Southwater.

If you’d like to discuss your inheritance tax liabilities and planning, please feel free to contact us on 01403 738777.

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