If you’re married you’ll be able to pass on up to £1 million to your children, but only if you leave them your main home. Find out how to make sure you can get the new £1 million inheritance tax allowance.
The current rules
At the moment everyone has an inheritance tax threshold, or ‘nil rate band’ of £325,000. This is the amount you can leave to someone else when you die, without them having to pay inheritance tax.
SAVVY TIP: The rules are a bit more complicated than this (of course they are!). If you’re married or in a civil partnership, you can leave as much as you want when you die to your husband, wife or civil partner and there’s no inheritance tax to pay.
What’s changing from April 2017?
The government announced a couple of years ago that married couples would be able to pass on £1 million to their family without paying inheritance tax. If are single or divorced when you die, you can pass on up to half a million. Not surprisingly, perhaps, the newspaper headlines reported ‘£1 million and no IHT’. But that’s not really the case.
What is changing is that from April 2020 if you’re married or in a civil partnership, you’ll be able to leave up to £1 million worth of assets between you (including your main home) to your child(ren), including any step children and/or foster children, or your grandchildren. This will be done through a new residential nil rate band, or RNRB, being phased in from today. If you’re single, you can pass on £500,000.
SAVVY TIP: If you’ve never owned a home, or you owned a home before July 8th 2015, when the measure was announced, but not since, you won’t be able to make use of this extra residential nil rate band. If you owned a property and sold it or downsized on or after July 8th you may still be able to make sure of this allowance. The way you can do this is by passing on assets of the same value. If you sell up and downsize, you should keep records to show that your home was originally worth £1 million or more.
Phasing in of the residential nil rate band
The extra IHT allowance is being phased in between now and April 2020. The residential nil rate band will increase like this per person:
- An extra £100,000 in 2017 to 2018, giving a total IHT allowance of £425,000
- An extra £125,000 in 2018 to 2019, giving a total IHT allowance of £450,000
- An extra £150,000 in 2019 to 2020, giving a total IHT allowance of £475,000
- An extra £175,000 in 2020 to 2021, giving a total IHT allowance of £500,000. If each spouse/ civil partner has £500,000 to pass on, that adds up to £1 million.
SAVVY TIP: This nil rate band will increase in line with inflation (consumer prices index) from 2021 – 22 onwards.
Who can’t use the extra IHT allowance?
There are several situations where you can’t take advantage of the extra IHT allowance;
- If your estate (assets and property you and your husband, wife or civil partner own) are worth more than £2 million, you’ll lose the additional IHT allowance at a rate of £1 for every £2 of assets you have over £2 million. Depending on the year you die, you could lose the residential nil rate band if your estate was worth more than £2.35 million (or less).
- If you don’t leave your home to your children or grandchildren and any grandchildren yet to be born. You can’t pass on this extra inheritance tax allowance if you don’t have any children or grandchildren or if you’re planning to leave your home to another family member (such as a sister or niece). However, if, for example, you were planning to leave half of it to your children and half to – say – a niece, you’d be able to use the residential nil rate band on the part of it your children inherit.
- If you’ve never owned your property or you sold or downsized before July 8th 2015.
- If you didn’t live in your home. You don’t have to have lived in the property directly before you died but you do have to have lived in it at some point. If you have more than one home, your executors or family can decide which was the main home.
NB Article updated to remove ‘If you’re in a marriage or civil partnership’ from the above bullet point list. Apologies for the incorrect information. It was meant to relate to who could pass on £1 million of assets, not who could make use of the additional IHT allowance. To be clear, if you are single or divorced when you die, you can pass on up to £500,000 of assets to your children or grandchildren, if it includes the main home.
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