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Increase in Inheritance Tax additional threshold

As we all know, 6th April 2018 saw the start of the new tax year. It also saw the increase of what is known in the legal world as the Residence Nil Rate band. This relates to Inheritance Tax and is sometimes known as ‘the additional threshold’.

But what is the Nil Rate band?

The Nil Rate band is legal terminology for the amount of tax-free allowance each estate can benefit from upon the death of the testator. It is currently set at £325,000. However, this amount rises to £650,000 for married couples or those in a civil partnership. This is because the amount is transferable if left unused upon death.

And what is the Residence Nil Rate band?

The Residence Nil Rate band was introduced in addition to this. It applies to deaths on or after 6th April 2017. This allows those estates where the value of such exceeded the Nil Rate band, to be able to benefit from a further tax-free allowance when leaving a residential home to lineal descendants. Upon introduction, this was set at £100,000. This has now risen to £125,000 for tax year 2018/2019 and is expected to soar to £175,000 by April 2020. Similarly, this is also transferable between spouses and civil partners on death. This is so even if the first partner died prior to 6th April 2017 and the introduction of this legislation, the other half can still benefit.

So, who can benefit from the Residence Nil Rate band?

This relief can only be enjoyed when one residential property, which was occupied by the deceased as a residence sometime prior to their death, is passed upon death to a direct or lineal descendant. As well as children and grandchildren, this includes step-children, adopted children and foster children. Notably, siblings, nephews and nieces are not included, creating the potential for what has been coined by experts as the ‘Sibling Tax Trap’.

This seems too good to be true – what are the main restrictions?

This relief is only available on estates under £2m. Once the estate is over this threshold, the relief tapers by £1 for every £2 over £2m. Putting it into context, if an estate is worth over £2,350,000 by 2020, it will not qualify for any relief. If the property is worth less than the Residence Nil Rate band for that tax year, the relief will be capped at the value of the property. Therefore, it will not be possible to hold-over the remaining relief and apply this to other assets within the estate. A beneficiary must be immediately entitled to the benefit of the property. The allowance cannot, for example, be used when the property is transferred to a discretionary trust contingent upon the beneficiaries reaching 21.

What does this mean for the future?

By 2020, it seems that married couples or those in a civil partnership will be able to escape inheritance tax on up to an impressive £1m of their wealth. In light of the new and rather complex rules, it is more important than ever to review your will. You should ensure that you are making the most of the tax-free thresholds which might be available to you!