Inheritance tax: When is £1m NOT £1m?

From April 2017, a new Inheritance Tax (IHT) nil-rate band is available in addition to an individual’s own nil-rate band. When it was announced in 2015, media headlines suggested that everyone could leave a tax-free legacy of £1m, but the changes will be introduced over the next few years, and don’t apply in every case. 

The new Residence Nil Rate Band (RNRB) will apply if you want to pass your main residence to a child (including an adopted or fostered child) or grandchild. Only direct descendants can benefit, and that doesn’t include nieces and nephews. So not everyone will be able to rely on the RNRB for IHT planning purposes.

The allowance is introduced in stages over four years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT which remains at £325,000.

How the RNRB applies 

Once fully implemented, each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. It can be passed from one partner to another on death, so when the first partner dies, if their entire allowance goes to their surviving partner, then they would have an allowance of £1 million. Where a property is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.

Planning for the future

It makes sense to review the terms of your Will. The RNRB may be lost if the main residence is placed into a Discretionary Will Trust for the benefit of children or grandchildren. The rules surrounding the operation of the RNRB and IHT planning are complex, so you should seek professional advice.

Tax treatment depends on individual circumstances. Tax treatment, rates and allowances are subject to change.