How to prepare for the rise of the residence nil-rate band in 2018

20 Oct How to prepare for the rise of the residence nil-rate band in 2018

Changes to inheritance tax in 2018 mean the residence nil-rate band will rise again. This could mean more savings when your estate is passed down.

In April 2017, a new “residence nil rate band” was introduced, providing individuals with an additional inheritance tax (IHT) allowance when they pass their main residence to children or grandchildren.

What is the residence nil rate band?

When applicable, the residence nil rate band increases the inheritance tax allowance by £100,000 per person; reducing the tax liabilities for eligible beneficiaries receiving family homes.

With the recent increase in property prices meaning more and more people are finding themselves liable for inheritance tax unknowingly, the additional allowance has been met by many families as a welcome move towards relieving an unanticipated burden.

More interestingly, the additional allowance is set to rise incrementally over the next three tax years. This means individuals could save even more inheritance tax in 2018 than in 2017.

Unfamiliar with the basics? Get in touch with our tax specialists.

What are the changes to inheritance tax in 2018?

From April 2018, the residence nil-rate band will rise from £100,000 to £125,000 per person.

This will increase again to £150,000 in 2019 and £175,000 in 2020.

Like the current £325,000 nil-rate band, the residence nil-rate band is transferable between spouses. This means that by 2020, it will be possible for married couples and registered civil partners to pass down assets of up to £1m to eligible beneficiaries tax free.

Are you eligible for these changes?

Certain conditions must be met for the residence nil-rate band allowance to apply.

  1. To begin with, the property or part of a property must be left in the estate and it must have been the main residence of the deceased.
  2. The recipient must be the direct descendant (i.e. a child, stepchild, adopted child, grandchild, great grandchild etc.) of the deceased.
  3. It is important to note that properties left in trust are not always eligible. It is therefore important to check with a legal advisor whether any trust provisions in your Will would effectively take advantage of the additional allowance.

It is also important to be aware that the allowance will gradually reduce for an estate worth more than £2 million, even if a home is left to direct descendants.

Be prepared for the changes to inheritance tax

It is important to review your financial plans sooner rather than later ahead of the changes to inheritance tax in 2018.

Inheritance tax is complex but it also presents an opportunity for you to tax plan with your estate in such a way that as little tax as possible is due when your beneficiaries inherit n.

Your solicitor can identify these opportunities and recommend the ones that will reduce your tax obligations and ultimately see you pass down as much of your assets as possible to your loved ones.

For a confidential discussion with one of our inheritance tax experts about how much you could save, speak to Fiona by calling 01865 704 781 or request a call back.