|Additional Nil Rate band - 29 June 2016|
Currently (2016) Inheritance Tax (IHT) is charged at a rate of 40% on the value of an estate above the nil-rate band, which has been frozen at £325,000 per person (or £650,000 for married couples and civil partners) since the Finance Act 2010 and remains frozen until April 2020.
From April 2017 a new tax free allowance is being introduced, referred to as the ‘family home allowance’ to be known as the Additional NRB . This new allowance will effectively remove the family home from inheritance tax and will help ensure that the family home can be passed onto a testator’s direct descendants with minimal burden. By 2020-21 this new allowance will be worth an extra £175,000 per person on top of the current Nil Rate Band (NRB) of £325,000. This will mean that by 2020-21 married couples and civil partners may pass on up to £1 million worth of assets to their children and grandchildren free of inheritance tax.
It is important to note that this new Additional NRB will be gradually phased in. Starting in 2017-18 the allowance will be worth £100,000 per person, £125,000 in 2018-19, £150,000 in 2019-20 and then will finally reach its full value of £175,000 in 2020-21.
For estates worth more than £2 million the Additional NRB will be gradually withdrawn at a rate of £1 for every £2 over the new threshold and will be unavailable completely for estates worth over £2,350,000.
The Additional NRB will be limited to only one residential property. If there is more than one residential property in the estate then it will be possible for the deceased’s personal representatives to elect a qualifying property. To qualify for the allowance a property must currently be their main residence or have been their residence at one point. Another important stipulation is that the property must be passed on to a direct descendant. Here a direct descendant includes children, grandchildren, adopted children, foster children or step children.
Please note that the property must be passed on to a direct descendant. This means that any property left into a Discretionary Trust would appear not to be covered. However assets left into a Property Trust or Life Interest Trust on the first death of a couple will qualify if the beneficiaries are direct descendants as above. Hence any clients who have a Discretionary Trust of assets in their Will and whose assets may exceed the basic Nil rate band of £325,000 per person should review their Wills prior to April 2017.