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A guide to the Main Residence Nil Rate Band.

A guide to the Main Residence Nil Rate Band.

What Are The New Inheritance Tax Rules? And Do They Benefit You?

A quick guide to the Inheritance Tax rules as they now stand and the new Main Residence Nil Rate Band.

First things first – what do you need to know about the current Inheritance Tax rules? 

Before we look at the new rules and how they affect you, let’s recap on the current rules which will remain unchanged. The main Inheritance Tax issues that you need to be aware of can be summarised in brief as follows:- 

  • You pay no Inheritance Tax on the first £325,000.00. 
  • Everybody has a “Nil Rate Band” allowance of £325,000.00. This means anyone can leave up to £325,000.00 when they die, without any Inheritance Tax falling due. Inheritance Tax is paid on any excess over and above £325,000.00. 
  • You pay 40% on anything over £325,000.00. 
  • Inheritance Tax is paid at a rate of 40%. So, for example, if you die leaving assets of £425,000.00, you have an excess of £100,000.00 over and above the Bill Rate Band, which means that the Inheritance Tax would be £40,000.00. 

Spouses have an exemption from Inheritance Tax 

Bequests that married couples leave to each other are completely exempt from Inheritance Tax. So, if you like, you can leave everything to your spouse or civil partner without incurring any Inheritance Tax. 

The Nil Rate Band can be transferred between spouses  

The Nil Rate Band is transferrable between spouses and civil partners. This means that, if you are the first to go, leaving everything to your surviving spouse or civil partner, incurring no Inheritance Tax, their Nil Rate Band will double on their death, to £650,000.00. 

This only applies to any unused portion of the Nil Rate Band. So, for example, if you left £10,000.00 to your children and the rest to your spouse:- 

  • You would have used £10,000.00 of your Nil Rate Band. 
  • Only the unused £225,000.00 would be transferrable to your spouse or partner. 
  • On your spouse’s death, their Nil Rate Band would have been swelled to £550,000.00 instead of £650,000.00. 

There are Inheritance Tax Exemptions 

Gifts that you give in the last seven years of your lifetime count towards assessing whether your estate must pay Inheritance Tax. However there are exemptions. You can give as follows, without incurring Inheritance Tax:- 

  • A maximum of £250 per year to any one person. 
  • A maximum of £3,000 in total gifts per year. 
  • A wedding gift of up to £5,000 for your child and their partner. 
  • A wedding gift of up to £2,500 for your grandchild and their partner. 
  • A wedding gift of up to £1,000 for anyone else. 
  • A donation to charity, either in your lifetime or in your will – you can also reduce the rate of Inheritance Tax payable if you leave at least 10% of your estate to charity in your will. 
  • Gifts from income – if you make gifts out of your normal income rather than out of your savings or capital, this will not count towards Inheritance Tax. 
  • Gifts to dependents – you can make tax-free gifts from your savings or capital assets to people who depend on you financially, such as your spouse, your ex-spouse, your children while they are under 18 or in full time education, or any other relative who depends on you financially. 

Potentially Taxable Gifts 

Any gifts that don't fall within one of these exemptions is POTENTIALLY liable to Inheritance Tax. A gift made during your lifetime will NOT attract Inheritance Tax provided that you live for a further seven years after making the gift.  

However, when making the gift, you must deprive yourself entirely of the property you are gifting. So, if you transfer ownership of your house to your children, but continue living there, that won’t count as an exempt gift for Inheritance Tax purposes. That is called a Gift with Reservation of Benefit.  

Tax Reliefs 

There are a number of tax reliefs regarding Inheritance Tax. Some may apply to you. It is important to obtain professional advice on whether you qualify for these reliefs. They include:- 

  • Business relief – when bequeathing a business as a going concern, Inheritance Tax is not payable at all. 
  • Agricultural relief – enables a working farm to be passed done the generations without Inheritance Tax being a feature. 
  • Woodland relief – the value of the timber in any woodland on land you own does not count towards you Inheritance Tax assessment. 
  • Heritage Assets – some items of historic or scientific interest to the nation can be exempt. 
  • The Death in Service Exemption – members of the armed forces killed in action are not liable to Inheritance Tax. 

 

The new rules – the Main Residence Nil Rate Band 

This is a generous new policy that was introduced in the 2015 Summer Budget. The Nil Rate Band of £325,000.00 has been frozen for a number of years, will remain frozen until 2018. The new policy has been announced in response to the rapid rise in house prices, particularly in the South East and in London which has taken many family homes outside the Nil Rate Band. The new measure introduces an additional Nil Rate Band in specific circumstances. 

How much is the new Nil Rate Band? 

The new Nil Rate Band will be phased in over several years, as follows:- 

An extra £100,000.00 is introduced from 2017. 

A further £25,000.00 will be added in 2018, 2019, and 2020. 

The end result will be that those who qualify for the additional Nil Rate Band will see their Nil Rate Band grow to £500,000.00 each by 2020. 

With the transferrable Nil Rate Band, this will mean that spouses will have £1million between them to pass without incurring Inheritance Tax. 

What are the restrictions? 

There are very clear restrictions however. 

The Additional Nil Rate Band only applies to the Main residence, i.e. the family home. So, it does not apply to investments or buy to let properties. It only applies to one residence, so if you have a holiday home you can nominate which property is your main residence. 

It also only applies if the family home is left to Direct Descendants. Direct descendants for this purpose are your children, grandchildren, stepchildren, foster children or adopted children. It does not apply to anyone else, such as your cohabitee if you are not married, or your parents, siblings or other relatives, your chosen charity or your friends. 

 

Are you potentially liable for Inheritance Tax? Is this something you’d like to find out more about? If so, feel free to give me a call on 0151-601-5399 or fill in the contact form below. The answers to your questions are just a phone call away.  

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