Keeping it in the family: Changes to inheritance tax with the new residence nil rate band

Changes to the inheritance tax system set to come into play from 6 April 2017 will enable many people to benefit from an enhanced inheritance allowance.

The additional nil rate band, known as the residence nil rate band, will apply so that less inheritance tax (IHT) may be paid when the family home is left to children, grandchildren and certain other qualifying beneficiaries.

Prior to 6 April 2017, IHT is charged at two rates (ignoring any reliefs for agricultural and business property):

• 0% on the first £325,000 (the nil rate band)
• 40% on everything in excess of £325,000

If any of the nil rate band is unused on the first death of a spouse or civil partner then on the death of the survivor the unused part can be transferred to the second estate. This is called the transferable nil rate band and is how surviving spouses and civil partners can have estates of £650,000 before becoming liable to IHT.

What is changing?

From 6 April 2017, an additional residence nil rate band (RNRB) will apply. This means that less IHT may be paid when the family home is inherited by certain direct family members, for example children, adopted children, stepchildren or grandchildren.

How much tax may be saved?

The value per person of the RNRB is initially £100,000 rising by £25,000 over the following three years to reach £175,000. It is transferable too, so after April 2021 married couples and civil partners may be able to benefit from a combined nil rate band and RNRB of £1 million.

Who can claim it?

The RNRB can be claimed if all of the following apply:

• you die on, or after, 6 April 2017.
• you leave an estate worth less than the upper limit of £2 million. (Between £2 million and £2.2million the relief tapers down until it is no longer available.)
• you leave your home to qualifying beneficiaries such as direct descendants and some other individuals such as stepchildren or foster children.

What about trusts?

A gift in a will to a trust can qualify for the RNRB. This will depend upon the type of trust and certain circumstances. With careful planning in relation to a will, and the administration of an estate, trusts can still be appropriate and will also qualify for the RNRB. However, every case is individual and if you have questions we recommend that you arrange to see us for bespoke advice.

What do you need to do?

To ensure that you maximise the tax-saving effect of the RNRB we strongly recommend that you review your will, or make a will if you do not already have one. The conditions for claiming the RNRB are complicated and you should get expert advice to ensure that your family can benefit from the enhanced nil rate band inheritance allowance in the future.

Simon leads our wills, trusts and probate team. He deals with all aspects of private client work such as trusts (including personal injury trusts), wills, powers of attorney, Court of Protection and estate planning and administration. Simon is also a member of the Society of Trust & Estate Practitioners and the Law Society Private Client Section.