As of 6 April, direct descendants can inherit up to £950,000 completely free of income tax from their parents or grandparents thanks to increases in the residence nil-rate band.
This tax-free allowance on inherited property has risen from £125,000 to £150,000 this year and will rise again next year to £175,000.
In order to qualify for this allowance, an individual must pass on their main home to a direct descendant, such as a child or grandchild.
Unfortunately, direct descendant doesn’t include nephews, nieces, siblings and other relatives.
This means that a married couple or civil partners who do not have any direct descendants that qualify will be unable to pass on their wealth using the residence nil-rate band.
The residence nil-rate band is layered on top of the existing basic allowance for Inheritance Tax (IHT) of £325,000 per person or £650,000 for a married couple or civil partners.
This means that spouses and civil partners could leave behind up to £950,000 in 2019-20, rising to £1 million from next year.
Where an estate is valued at more than £2 million, the residence nil-rate band will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold.
People can downsize and still benefit from the residence nil-rate band (RNRB). The new provisions allow for a person or couple to downsize to a less valuable residence as long as the new property, together with other assets of an equivalent value to the ‘lost’ RNRB, have been left to direct descendants.
The band also affects those that have released equity from their property. The value of any outstanding loan against the property will have to be deducted from the value to arrive at the net value to be used to calculate the relief.
Individuals in England and Wales will incur IHT at a rate of 40 per cent on all estates valued over this threshold, so it is worth planning ahead to make sure you minimise any liabilities.
Rachael Verinder, Tax Partner at Milsted Langdon, said: “The latest rise in the residence nil-rate band will be welcome news for those families looking to pass on wealth to the next generation.
“The number of people required to pay Inheritance Tax has risen steadily in recent years, driven mainly by the rising value of property.
“While this relief is welcome, it is important to consider how you can make the most of the allowances available. There are many complexities to this allowance, including where assets qualify for business property relief, where gifts are made during lifetime and where trusts are involved. If you would like Inheritance Tax advice, please contact us.”