The new inheritance tax allowance on residential properties

Originally announced when George Osbourne was still Chancellor back in 2015, the long-awaited changes to inheritance tax on residential properties came into effect on 6th April 2017.

Currently, each estate benefits from a tax free allowance of £325,000. The residual amount exceeding £325,000 will be subject to inheritance tax at 40%. Given that the average price of a residential property in Bromley Borough is rapidly approaching £450,000; many estates are likely to face inheritance tax.

Married couples, who pass on their wealth to the surviving spouse on death are not liable to inheritance tax and additionally can transfer any unused tax-free allowance to the surviving spouse. So if the first spouse has not used any of the allowance, the tax-free allowance doubles to £650,000 for the estate of the surviving spouse. It should be noted that this ability to transfer the unused allowance does not apply to unmarried co-habiting couples.

However, in April the government introduced an additional allowance, called the ‘Residence Nil Rate Band’.  This applies separately from and in addition to the current tax-free allowance. The key aspects of the new ‘Residence Nil Rate Band’ are summarised below:

• The additional allowance was  introduced at £100,000 in April 2017 and will gradually increase to £175,000 by 2020. 

• A surviving spouse can again benefit from the transfer of their deceased spouse’s unused Residence Nil Rate Band. By 2021, this could potentially mean a cumulative tax free allowance of £1M for married couples.

• The additional allowance applies if you own a home at the date of your death.

• The allowance does not need to apply to your main home, but can also apply in relation to any property which you have lived in at some stage, for example a holiday home.

• The allowance can only be set against one property.

• That residential property must be inherited by ‘lineal descendants’, which most notably includes children or grandchildren, but can also include their spouses, stepchildren and adopted children.

• But would not include: siblings or nieces and nephews etc. 

• Special ‘downsizing’ rules mean that the additional allowance may still be available even if you sell your property during your lifetime, as long as a part of your estate then passes to lineal descendants after your death.

• For estates valued in excess of £2 million this additional “Residence Nil Rate Band” will be reduced on a sliding taper.

You should consider reviewing your Will in the light of the changes, since even peripheral aspects of it may have a substantial impact on your qualification for the additional allowance. Judge & Priestley are offering a free will review service and if you wish to take up our offer please contact Brian Tan on 0208 290 7353 or email btan@judge-priestley.co.uk