It is understandable that you would want to shield your estate from inheritance tax as much as possible, to ensure you can take care of your loved ones after you pass away. There is a new rule coming in called the ‘residential nil band rate,’ which could prove advantageous to you. Here is the residential nil band rate explained, so you can determine where it could help you with inheritance tax.
Overview of inheritance tax
Your estate may be obliged to pay some inheritance tax to the British government. We all get a nil band rate (currently £320,000), and we don’t pay any tax on anything under this limit. However, you pay a 40% inheritance tax on anything over this threshold. It’s important to note, however, that there’s no inheritance tax due on anything you bequeath to your spouse or civil partner, after you die.
Residential nil band rate
But inheritance tax laws are due to change in 2017, with the arrival of the residential nil band rate. This will allow you, from 5th April 2017, to add £100,000 to your nil band rate, to offset the sale of your family home. The £100,000 will be gradually raised to £125,000 by 2020. This means that as of 2020, you could potentially have an inheritance tax allowance of £500,000. It will also be transferrable between spouses, so it could allow you to pass on £1 million to your loved ones together tax-free.
There are certain drawbacks, however, to the residential nil band rate. You will only be able to utilise the allowance, for example, if you directly bequeath your family home to your children, stepchildren, adopted children or grandchildren. You will also not be able to benefit from the residential nil band rate if you have left your family home in a trust. If you have adopted this strategy, we would strongly advise you to update your will, so you can pass on as much to your loved ones tax-free as possible.
There are also certain parties who will not benefit from the rate. If your estate is worth over £2 million, you will received a reduced allowance, losing £1 for every £2 in wealth over the £2 million mark. Many business owners may not be allowed to claim the residential nil band rate, as they receive business property relief. This will be included in the value of a business owner’s estate, for residential nil band rate calculation purposes, potentially raising this value past £2 million and disqualifying them.
If the value of your estate, for one reason or another, eclipses the £2 million mark, there are ways to still ensure you benefit from the residential nil band rate. You can make lifetime gifts while you are still alive, as these are removed from the value of your estate, for residential nil band rate purposes, as long as you live for seven years afterwards. This is a complex issue, however, as there are various rules that govern inheritance tax gifts, so it is wise to enlist expert aid when utilising this strategy.
Prestige Tax and Trust Services
The introduction of the residential nil band rate this April could really benefit you. It may allow you to pass more wealth onto your loved ones after you die. But the residential nil band rate is complex, and it pays to go experts, if you are considering utilising it, to ensure you receive the full benefits. Prestige Tax and Trust Services would be happy to help. We very knowledgeable on inheritance tax matters, so we can ensure that you pass as much money onto your loved ones as possible, after you die.