The Chancellor’s emergency budget back in July brought about many changes that impact future financial planning. One widely welcomed announcement was the introduction of main residence Inheritance Tax relief.
Whilst the changes to Inheritance Tax are positive on the whole, there are a number of key elements that you need to be aware of before you make any decisions.
What is the main residence Inheritance Tax relief and when will it apply from?
The new Main Residence Nil Rate Band (MRNRB) will be introduced in April 2017 at only £100,000. The band will then increase in increments each year until 2020, when the maximum £175,000 will be reached.
What is the maximum allowance?
The changes will allow a potential £1 million maximum Inheritance Tax allowance. For a married couple (or civil partners), this is made up of the existing £325,000 standard nil rate band for both spouses, plus an additional Main Residence Nil Rate Band of £175,000 for both husband and wife (or civil partners).
In order to benefit from the maximum £1 million allowance, the following conditions would need to apply to your circumstances:
- Be married or in a civil partnership
- Own a house worth £350,000 or more
- Have a total estate of less than £2million
- Die after April 2020, or your spouse must die after that, because on first death any unused nil rate band is transferred to the surviving spouse.
What if my estate is worth over £2 million?
The MRNRB will be means-tested, meaning that overall estates valued above £2million will lose £1 of their MRNRB for every £2 that their estate exceeds £2million.
Who can I pass my property on to under the rules?
The MRNRB will only apply if the property is left to direct decedents – ie. the surviving spouse or children.
As we approach later life, it’s natural to think about how we might pass an inheritance down to our children and/or family members. With the forthcoming changes to Inheritance Tax, along with the radical reforms to pensions that came into place this year, it’s now more essential than ever to seek advice in order to maximise the amount that can passed on to the next generation.
To speak to one of our financial planners about how the changes might affect you, please get in touch.
NB. The information contained within this article does not constitute financial advice.
The Financial Conduct Authority does not regulate tax advice.