According to HMRC statistics, each year residential property makes up approximately one third of the total value of a taxable estate and the continued rise in property prices has contributed to a rise in the overall tax paid.
The good news is that from 6 April 2017 the Government will bring in a new tax allowance which will apply specifically to your main residence. This band is referred to as the Residence Nil Rate Band (RNRB). The RNRB could eventually give an estate an additional tax free allowance of up to £350,000 for a married couple or civil partners or £175,000 for a single person.
So what’s the bad news? Well, the rules are certainly not straightforward. Not every estate will automatically qualify and the terms of your Will can affect the ability of your family to claim the new RNRB.
Currently an individual has a Nil Rate Band (NRB) of £325,000. Married couples or civil partners can transfer any unused NRB to a surviving spouse or civil partner, giving them a maximum NRB of £650,000. Anything over that amount is taxed at 40%. In addition to this, from 6 April an estate will be entitled to the new RNRB if all of the following conditions are met:
For deaths that occur in this upcoming tax year, the RNRB amount available will be £100,000. This amount will increase yearly and any unused RNRB can be transferred to a spouse or civil partner in the same way as the current allowance.
It is worth noting that the RNRB will also be available when a person downsizes or ceases to own a home after 8 July 2015. In these circumstances, it will be important to keep records of the sale of the property along with evidence that the property sold was your main home.
There has been some concern about the effect that this new allowance will have on housing. The Government has admitted that this measure could marginally increase demand for housing. We will have to wait to see if it will also have an impact on house prices and rent levels as people try to ensure that they achieve as much tax free allowance as possible.
Finally, it is important to remember that the rules have not come into force yet and it is possible that the Chancellor may decide the rules are too complex and change them before April. Any change in Government may even mean that the rules are scrapped entirely! Until then, it will be important to seek expert advice to ensure that your Wills are prepared correctly to allow your family to benefit from this new allowance.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.