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Inheritance Tax – Residence nil rate band

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Based on the draft legislation (there could still be minor amendments) the conditions for the above are as follows:

Due to be introduced on 6th April 2017 this will be in addition to the current standard nil rate band (inheritance tax threshold). Its intention is to protect the value of a family home from inheritance tax, up to the limits noted below, where the property is being passed on to children or grandchildren (or their spouses).

It is due to be phased in between the tax year 2017/18 to 2020/21 as follows:

  • £100,000 per person – 2017/18
  • £125,000 per person – 2018/19
  • £150,000 per person – 2019/20
  • £175,000 per person – 2020/21

Thereafter this allowance will increase by the Consumer Price Index (CPI).

Further Details On The Nil Rate Band

The allowance can be offset against the value of a property which has been occupied as the family home and on death is left to the direct descendants of the deceased (or their spouses/civil partners or widows or widowers who have not remarried at the time of death).

Any allowance not used on the first death (on or after 6th April 2017) of a couple can be transferred to the surviving spouse or civil partner in the same way as the standard inheritance tax allowance. If the first death was before 6th April 2017 the brought forward amount is a fixed £100,000 (subject to tapering where the net value of that person’s estate before reliefs and exemptions was in excess of £2 million).

Dealing With Multiple Properties

Where there is more than one property the personal representatives of the deceased can nominate which property; however, for calculation purposes any mortgage is deducted from the value of the property nominated. Where they exist, a review of any mortgage arrangements would be prudent to ensure the greatest benefit is made from this allowance, bearing in mind the value of the respective properties.

The personal representatives have two years from the end of the month in which the deceased died, or if later within three months from the date they started to act, to claim this allowance.

The allowance is still available where “downsizing” has occurred as long as assets of equivalent value are passed on death to those noted above, the property disposed of had been owned by the deceased and they would have qualified for the allowance had they retained it.

Rules To Watch Out For

So far, so good, a welcome additional allowance; however, bear in mind:

  • Where the deceased’s estate exceeds £2 million the allowance is reduced for every £1 for every £2 in excess of £2 million.
  • It will only apply in full where the residence (or nominated property) is at least £175,000 (from 2020/21).
    Couples must be married (or in a civil partnership), have children and are able to pass their main residence to their direct descendants.
  • The standard £325,000 threshold remains frozen until 2021.

Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority (FCA). 8 Castlegate Grantham Lincolnshire. 01476 591022. Tax advice is not regulated by the FCA.

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