Main residence nil rate band: Get the most out of your Will

Make sure your Will is updated in line with legislation changes

It had long been the intention of the Conservative government to increase the threshold at which inheritance tax is paid and allow for a greater amount to be passed down within families tax free.

Talk was of a tax free £1 million and this is now on the horizon as it is being phased in slowly. However, you may need to review your Will to ensure that your family will benefit from this.

Essentially we all have a nil rate band of £325,000 and inheritance tax is only payable once this threshold has been exceeded. An additional nil rate band of £175,000 began to be phased in from 6 April 2017 initially at £100,000 then increasing by £25,000 each April to reach £175,000 in April 2020.

So, making your Will with this in mind means that your family could benefit from a tax free threshold of £500,000 in your estate or a tax free threshold of £1 million between the two parents.

As always the devil is in the detail. Whereas the original nil rate band applies across the board, this relief is only available where a qualifying residence passes to children, including adopted, fostered or step children or linear descendants on death.

There can be complications where the home is not passed down directly. For example life decisions, such as downsizing or the sale of the home to live in a supported environment or with family, can effect entitlement to this relief but if managed correctly need not mean that relief is lost.

The use of Trusts in Wills also causes complications, for example where arrangements exist which constitute a trust having been made, the relief is lost unless the trust gives the child or grandchild an absolute interest or interest in possession in the home. Certain other trusts such as Bereaved Minor Trusts, 18-25 years of age Trusts and Disabled Persons Trusts can also retain this relief. However the use of Discretionary Trusts can cause this relief to be lost. A deed of variation, within two years of death, can potentially rescue the situation although this can be difficult.

High value homes owned by married couples as “joint tenants” can also cause a loss of relief. As although the survivor “inherits” any unused nil rate bands they solely own the property so the value of their estate can breach the £2 million threshold and cause the relief to be tapered, potentially to zero. This can be avoided by switching ownership of the property to “tenants in common” which allows the deceased to leave part of their share of the home to their children instead.

If your Will was written before the Chancellor’s 2015 Budget, where this new allowance was announced, it is worth revisiting this to ensure that this valuable new relief, which can produce a tax saving of £140,000 per couple, will be available to your family.

We are happy to, and regularly do, work with clients’ solicitors to ensure that Wills are as tax efficient as possible and would be pleased to discuss this with you. Also if you are already passing cash down to your family please talk to us about the surplus income exemption, which can prevent cash gifts made in the seven years prior to death being brought back into your estate and charged to tax.