In the Summer Budget last month, the Chancellor, George Osborne, announced the introduction of an additional Inheritance Tax Relief for the family home. This is in line with the pre-election promise to remove family homes worth up to £1 million from Inheritance Tax. Although this headline figure still applies, as always, the devil is in the detail and the new rules are not entirely straightforward.
Under current rules, each individual has nil rate band allowance of £325,000 which is the amount any individual can pass Inheritance Tax free upon their death. For married couples this allowance can be added together giving married couples a combined allowance of £650,000.
Although historically the nil rate band has increased in line with inflation, it has been announced that it will now be fixed at £325,000 until 2020/2021.
The new main residence nil rate band will work alongside the existing nil rate band. This will be set initially at £100,000 in 2017/2018, increasing to £125,000 in 2018/2019, to £150,000 in 2019/2020 and up to £175,000 in 2020/2021. Like the traditional nil rate band, the residence nil rate band can be combined for married couples giving the headline figure of £1 million in 2020/2021 – £175,000 + £325,000 x 2.
However, there are a number of limitations to the applicability of the new residence nil rate band. For example, in order to qualify the family home must be left to direct descendants. The relief cannot be applied to a property never used as a residence by the deceased and if the total estate is worth more than £2 million the relief is tapered so that the full allowance cannot be utilised.
The complexity of the rules means that proper advice should be obtained.