Many people are now familiar with the basic principles and workings of inheritance tax on death. Broadly, the first £325,000 (“the Nil Rate Band”) of a deceased’s assets (known as their “Estate”) is taxed at 0% and the balance above that is taxed at 40%, unless certain reliefs or exemptions apply. The Nil Rate Band can be increased to £650,000, if that deceased had a spouse or civil partner who died before them, leaving an unused Nil Rate Band that can be transferred.
The Conservative Party pledged in their election manifesto to increase the allowance in respect of inheritance tax, so as to benefit families wanting to pass on a property down to their children. A new allowance known as the “Residence Nil Rate Band” is being introduced for deaths occurring on or after the 6th April 2017 and will be in addition to the “Nil Rate Band” allowance.
However, the new relief will not be available in all cases and the rules governing which estates will benefit from this new additional allowance are complex. In brief, for an estate to qualify, the following will need to apply:-
• The estate will need to include a residence or interest in a residence (i.e. a property in which the deceased resided) unless the complex downsizing provisions apply. Hence, a holiday home can qualify as a residence, provided that the deceased had resided there at some point in his/her lifetime, whereas a buy-to-let property would not qualify.
• The residence must be inherited by a “direct descendant”. The legislation provides a fairly wide definition of “direct descendant”. Hence, the definition is not restricted just to direct blood descendants but includes step-children, adopted and foster children, as well as the spouses and civil partners of such descendants.
• The value of the deceased’s assets will need to be within a permitted range of values.
The exempt allowance will be up to £100,000 from April 2017 rising to £175,000 in the tax year 2020/2021.
Whilst any additional inheritance tax allowance is good news, this does make the calculation of inheritance tax on a deceased person’s assets far more complicated, resulting in increased responsibility and risk for many Executors/Personal Representatives.
If you are an Executor or Personal Representative requiring assistance through the Probate or Inheritance Tax calculation process, then please speak to one of our specialist Solicitors Adam Bruce, Ceri Davies or Luned Voyle on telephone number 01267 237441.