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Inheritance tax nil rate band and how it may affect your will.


The new additional inheritance tax nil rate band announced in the recent Budget will affect individuals with direct descendants.

The definition of a direct descendant includes a child (including a step-child, adopted child or foster child) of the deceased, their children and grand children.

From April 2017, an additional inheritance tax nil rate band will be available when a residence is passed on death to a direct descendant. According to HMRC, “the qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.”[1]

For each individual, the additional nil rate band will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21.

It is planned that it will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards.

Any unused nil rate band will be able to be transferred to a surviving spouse or registered civil partner by way of an application by their Personal Representatives in the same way as the current transferable nil rate band works. This will be available on the death of the survivor if it occurs on or after 6 April 2017 irrespective of when the first spouse or registered civil partner died.

Much has already been made of how ‘downsizers’ will be affected. The policy includes provision that the additional inheritance tax nil rate band will be available when a person downsizes after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants. This immediately creates a clear need for people to keep clear records so that the proceeds of sale can be traced to the satisfaction of HMRC. The provisions relating to people who downsize will be included in the Finance Bill 2016.

There will be a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold.

It is important to note that the additional nil rate band will apply to reduce the Inheritance tax payable by an estate on death and that it will not apply to reduce the tax payable on failed “potentially exempt transfers”.

We will need to wait for the Summer Finance Bill 2015 for further details and confirmation of the draft rules.

If you would like to review your current will, please contact Clare King on 0113 336 3363 or clare.king@clarionsolicitors.com.

[1] HMRC, “ Inheritance tax: main residence nil-rate band and the existing nil-rate band”

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