The nil rate band
Today we thought we’d like to talk about the main residence nil rate band for inheritance tax.
Now hold on there. Before you click away, or as the case may be, before your swiping finger takes you to another page, let us reassure you. First, that this is really not all that complicated; and secondly, that it’s actually quite important.
You’ve heard of inheritance tax, right? Maybe just referred to as IHT. Good, we thought so.
But just in case, take a look at Simplify the Law’s pages on the subject:
That means you’ve probably heard of the nil rate band. As well as the many of you who have, we’re also expecting one or two voices saying “that rings a bell” or “yes, I think so – just remind me…” So for the benefit of those folk – the nil rate band is the first £325,000 of someone’s estate, and it isn’t liable to IHT. What could be simpler than that?
£325,000 is the current threshold – it hasn’t changed for years, but it could do in a year or two. It’s one of those things which is always being debated in Parliament, because it’s obviously going to affect people more the wealthier they are. So it’s a political football which is almost always in play.
The main residence nil rate band
As from 2017-18, though, there’s going to be a new nil rate band. For main residences. Some people are calling it the family home allowance. But if you look on the HMRC website, you’ll see that they’ve given it the more descriptive (but perhaps less clear) title of main residence nil rate band – and they should know. Basically, however, it’s about the family home.
This band is going to start at £100,000 in its first year, and increase to £175,000 by 2020-21. When you add that to the £325,000, that means that if there’s a family home as part of the estate, the nil rate band will be £500,000.
And it gets better. As you know (yes, of course you did), a spouse doesn’t pay IHT. And if their deceased partner’s estate didn’t use up the whole of their nil rate band, the unused portion gets added to the surviving spouse’s allowance. Which means, potentially, two lots of £500,000 – or, yes, £1 million, which wouldn’t be subject to IHT.
And the catch?
We bet you were expecting us to say – there isn’t one; it’s as good as it sounds. Sadly, however…
This new residence nil rate band is only going to count when property is passed down to children or grandchildren. Not siblings, nor nieces, nephews, godchildren… just children and grandchildren.
Objections have been raised – quite loudly, too – to this limitation, which on one level seems unfair, or illogical, or both. We don’t think it’s really our place to offer an opinion unless we think it’s unfair, or illogical, or both…
This is quite a new thing, though, and we wouldn’t be surprised if there were a few tweaks to the rules before too long.
What to do about it?
Whatever the final position, it’s definitely worth making sure your will reflects your wishes so that your heirs can get the benefit. In particular, if you want your grandchildren to benefit – and sometimes that’s the best way of maximising the value of your estate in the future – you need to leave them the property in your will. That also (and this is so obvious it almost doesn’t need saying) is the best way to make things clear and manageable after you’ve gone.
We like simplifying things – for ourselves, for our families and for our readers. In fact, a day when we haven’t made life simpler for somebody, somewhere – we consider a wasted day. Which is why we’re such big fans of making wills.
You should make one, you know. And here’s how you can do it.