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IHT thresholds on residential property

Make the most of inheritance tax allowances on residential property

April 2017 saw the introduction of a new ‘family home allowance’ called the main Residence Nil-Rate Band (RNRB) which allows for more of an estate to be bequeathed free of inheritance tax (IHT).

The current threshold at which an estate becomes potentially liable for IHT at 40% is £325,000.

This allowance applies to residential property when it is left to ‘direct descendants’, for example,  children, stepchildren and grandchildren.  The allowance results in an additional £150,000 of nil-rate band — the term for the tax-free allowance — for any deaths that occur during the current tax year.  Originally, the allowance was £100,000 and this has been increased by £25,000 each tax year, reaching  £175,000 in 2020/21.  Future increases will then be in line with the Consumer Price Index. These figures are per person, so a married couple may benefit from double the allowance.

In order to qualify, you must own a property, or a share in a property, which you have lived in at some stage (so, for example, an investment buy-to-let property would not qualify) and which you intend to leave to your direct descendants. For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million (known as a ‘tapered withdrawal’), or 50% of the value in excess of £2 million.  This allowance only applies on death, and not on gifts or any other lifetime transfers.

You won’t qualify for the increased nil-rate IHT band if you’ve assigned your sibling or any other relation to inherit your family home, as the rules only apply to your direct descendants.

The relief will not be available when property has been left in trust, and it is important therefore that why wills should be reviewed should you wish to take advantage of this.

Like the nil rate band for inheritance tax, the RNRB can be transferred between spouses if it is not used in whole or part when the first spouse died, even if the first death occurred before 6th April 2017. It also means that by 2020-21, a married couple potentially could leave their loved-ones a combined estate of up to £1million without being liable for IHT.

It is possible to protect the RNRB if you downsize or sell your family home and move into rented accommodation or a nursing home, however, you will need to provide evidence of the sale of the property.

Rising house prices in many areas of the country mean that thousands more people every year become liable for IHT. If you want to pass the value of your family home onto your children or grandchildren, the nil rate band itself is now frozen until at least April 2021. However, for the unmarried, and for those who leave no children or grandchildren, the inheritance tax nil rate band will remain the same.

Business owners are also likely to miss out on the tax savings. Most businesses can be passed down the family free from IHT because they qualify for Business Property Relief. However, even when this is the case, its value will be included in the value of estates for RNRB purposes, often pushing them over the £2m mark.

To get the most out of the tax saving effect of the residence nil rate band you should review your will, or make a will if you do not have one. 

The conditions for claiming the residence nil rate band are complicated, and we would urge you to seek professional advice to discuss the options available to you based on your individual circumstances.

For further information please contact our Director of Tax, Aaron Phillips:

Written October 2019.

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