The impression the law was set out to give was that couples could leave behind £1m inheritance tax free.
What actually happened was that there was an introduction of a £175,000 nil rate band which will apply to the value of your main residence and will be in addition to your £325,000 personal nil rate band allowance. The effect is to give the impression that an individual could leave up to £500,000 and a couple £1,000,000 before IHT becomes chargeable. However, the allowance will not be available until 2017 when it will be introduced at a lower £100,000 level and then slowly increased by £25,000 per year until the full £175,000 is claimable in 2020/21.
This new allowance will also only be available when the deceased has bequeathed their property to ‘direct descendants’. Direct descendants are described as children, grandchildren, step-children, adopted and foster children and, and following an amendment, now also includes a spouse or civil partner of a direct descendant or a surviving spouse or civil partner if they have not remarried or formed another civil partnership.
However, a Will which provides for your estate (including your interest in the property) to pass into a Discretionary Trust (even if the only beneficiaries are you children and grandchildren) may not qualify for the relief.
The amount of main residence nil rate band will also be reduced if the value of your combined estate exceeds £2.m. The allowance will taper by £1 for every £2 that your estate exceeds this sum, thus meaning that when the allowance is fully in force then it would not be available once the joint estate exceeds £2.7m.
The relief can also only be claimed against a freehold or leasehold residence, and therefore unless your estate includes a property which you used, or intended to occupy as your home, the main residence nil rate band cannot be claimed.
If the property value does not equal or exceed the amount of main residence nil rate band allowance then any ‘unused’ allowance’ cannot be applied against the value of other assets comprised within the estate.
An illustration would be a couple leaving their estates (on second death) to their children have a property worth £200,000 and cash/investment assets of £800,000. The maximum amount of main residence nil rate band claimable would be £200,000 and the maximum amount of nil rate band claimable against the cash assets would be £650,000, leaving in this example £150,000 subject to Inheritance Tax.
Therefore, for those who thought they would no longer have an IHT liability, there may be disappointment. It has never been more important to have a well thought out estate plan, complete with an appropriate Will and supporting documentation, to ensure your assets can pass to your loved ones in a tax efficient manner.
Please contact me on [email protected] or 0800 061 4494 to find out how I can best help you protect your family and your assets.