Inheritance Tax Planning and the Family Home

Every person can pass on £325,000 before paying inheritance tax, which is 40% on anything above this amount. This is called the inheritance tax ‘nil rate band’. This ‘nil rate band’ is transferable so you can inherit any unused allowance from your husband or wife. This means that married couples have a joint ‘nil rate band’ of £650,000.

Most people’s estate includes a property. As property prices have been rising rapidly over the past few years, the Government is giving people an extra allowance to prevent more people falling into the inheritance tax trap.Crucially, you only qualify for this new allowance if your estate includes a property that you have used as a home at some point in your life. There is also the requirement for the residence to be passed on death to a direct descendant such as a child or grandchild. This is usually specified by the individual’s Will. This allowance is being phased in. This additional allowance is referred to as the ‘residence nil rate band.’ Since April 2018, the allowance for an individual is £125,000. Your spouse has the same allowance, effectively doubling what can be passed on to £250,000.

Each year, this ‘residence nil rate band’ increases by £25,000 until April 2020, when the allowance reaches £175,000. This means an individual may be able to benefit from an aggregate nil rate band of £500,000 before inheritance tax becomes payable. As married couples can inherit any unused allowance from their spouse, a potential £1m can be available.

The ‘residence nil rate band’ applies to only one home. It must be included in your estate (i.e. it’s something that you are passing on) and you need to have lived in it at some stage in your life. The good news is that you do not have to have lived in or owned the property for a minimum time – it can be any property you’ve lived in at some point.

If you have a larger estate, the main residence nil rate band, and therefore the amount you can pass on free of inheritance tax, reduces gradually. This is called a ‘taper’. For every £2 that your estate is over £2m, the ‘residence nil rate band’ is reduced by £1. So, if your estate is worth £2.25m in the 2018/19 tax year, you will lose the entire ‘residence nil rate band.’

How will it affect your family? If you would like to discuss how to take advantage of these and other inheritance tax reliefs and exemptions, please contact Brian King on 02476 221 046 or email [email protected].