The Inheritance Tax Trap - Not updating your will could be an expensive mistake
After being announced back in the summer of 2015, the first stage of the new residence nil rate band was introduced from April this year.
Provided the conditions are met, each taxpayer could have a further £100,000 to add to the existing £325,000 nil rate band. This allowance is set against the value of an individual's estate on death and therefore reduces the amount subject to inheritance tax.
A further £25,000 will then be phased in over the next three tax years before reaching the maximum £175,000 (or £500,000 including the existing nil rate band) by April 2020.
If an individual passes their entire estate to their spouse or civil partner on the first death, this will be exempt from inheritance tax, regardless of the value (on the assumption both partners are UK domiciled). Any unused nil rate band on the death of the first spouse can then be claimed against the estate of the second, enabling a combined estate of £850,000 (or £1 million once the new allowance is fully phased in).
Why will this affect our wills?
The new residence nil rate band is only available when a main residence is passed on death to a direct descendant such as a child or grandchild. A large number of wills, particularly if drafted prior to 2007, may leave part or all of the estate into a discretionary trust.
In this situation, although the children or grandchildren may be the beneficiaries of the trust, they will not inherit the property directly and are therefore the main residence nil rate band is unlikely to be available. This could result in an additional Inheritance tax liability for a married couple of £140,000.
The position can also be complex when planning for unmarried partners with children together.
Please contact your local Perrys branch if you require any advice on inheritance tax, wills or probate.
Article written by Craig Harman
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