With the new financial year, the government has formally introduced new guidelines regarding leaving property in your will. The new regulations are expected to make it easier for many to pass-along homes without incurring tax and this article explains the changes and why they may be relevant to you.
Residential Nil-based Rate
Estates above the standard inheritance tax (IHT) threshold of £325,000 in the UK are taxed at a rate of 40 per cent. This affects many people particularly in respect to passing along their homes as house prices in the UK continue to rise.
In response to this, there has been a new change to IHT to protect your main property. The new ‘main residence’ allowance allows you to pass your main property of residence on to direct descendants. Property valued up to £425,000 (previously £325,000) can now be inherited by your loved ones without incurring any tax.
The new residential nil-based rate (RNBR) means that there is now an additional £100,000 tax-free allowance on property so that you can ensure your children and grandchildren safely receive a larger share of your estate before IHT is a factor.
RNBR in years to come
Rising house prices are leading to more and more families being affected by IHT directly due to property. The government is taking steps to slacken this to make it easier for future generations to inherit family homes at a lesser cost.
While the RNBR has increased this year by £100,000, is it set to rise by £25,000 year on your up until 2021, where the tax-free allowance will cap at £175,000. Directly translated to property, by April 2021, the RNBR will enable you to give your children and grandchildren homes up to the value of £500,000 without incurring any IHT.
The importance of planning
Though the new rules will reduce the burden of IHT for many hard-working families, it is still important to plan and prepare your affairs to ensure all your assets are well protected. Once your estate value surpasses the threshold, you are subject to the standard 40 per cent tax rate. If this is the case for you, it is worth considering ‘gifting’ assets (such as high-value properties and holiday homes for example) to your loved ones sooner than later.
Giving away your assets reduces the amount of tax payable on them after three years. The tax rate initially reduces to 32 per cent on assets gifted three years ago, 24 per cent on those gifted five years ago and, eventually, to a zero tax rate on all assets gifted more than seven years ago.
Prestige Tax and Trust Services
From discussing wills, forward planning and trusts, Prestige Tax and Trust services are on hand to offer information and advice to you and your loved ones. Inheritance tax laws and restrictions can be complex, so our expert team can guide you through the process and latest legal implications to ensure your affairs are properly taken care of.