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18th September 2020

Is your Inheritance Tax allowance now £500,000, or perhaps even £1,000,000?

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The answer is that with careful planning it may well be – as a result of another increase in the Residence Nil Rate Band in April 2020.

The Residence Nil Rate Band is an extra Inheritance Tax allowance, on top of the ordinary Nil Rate Band of £325,000. It was introduced at £100,000 in April 2017, increasing by £25,000 in each subsequent tax year to its upper limit of £175,000 from 6 April 2020. As a result, many individuals will now have the potential for a total Nil Rate Band of £500,000 (the ordinary Nil Rate Band of £325,000 and the Residence Nil Rate Band of £175,000). It is transferable between spouses in the same way as the ordinary Nil Rate Band and this means that many married couples or civil partners have the potential for combined Nil Rate Bands of £1,000,000 on the second death.

Broadly, the Residence Nil Rate Band applies to those who die on or after 6 April 2017 leaving an interest in a property (which they occupied as a residence at some point) to ‘direct descendants’. The term ‘direct descendants’ is widely drafted to include children and grandchildren and also their spouses and stepchildren.

It is a potentially valuable allowance which can significantly reduce or eliminate the Inheritance Tax payable on a taxable estate. Unfortunately, it is also a very complex allowance which does not apply to everyone and is subject to a number of conditions and limitations. For example, it doesn’t benefit those without children or grandchildren (or stepchildren); it only applies to certain types of trusts for children and grandchildren and it doesn’t apply where property is left on discretionary trusts. It is subject to a ‘taper threshold’ which means the allowance is reduced or withdrawn altogether for those whose estates exceed £2,000,000.

There may be significant changes to Inheritance Tax ahead following a recent report on the reform of Inheritance Tax, but for the moment the Residence Nil Rate Band is a significant benefit to many and careful Will drafting may be the key to maximising its benefit. If you would like advice on whether the Residence Nil Rate Band will apply to your estate and how your Will could be drafted to benefit from this additional allowance, please contact Hauke Harrack on 01604 463131 or click here to email Hauke.