“Nothing is certain except death and taxes,” goes the saying coined by Benjamin Franklin, and of course when it comes to inheritance tax the two unpleasant realities go together.
If you are a homeowner, usually your property will take up the majority of your estate when you die. Inheritance tax, which is charged at a rate of 40%, is applied above a threshold of £325,000. The fact that the £325,000 tax-free limit was frozen for 2018/19 made headlines, not least because it has not increased since 2009. This means many argue it is now a burden to many people who cannot be categorised as wealthy, as more and more estates become eligible for inheritance tax each year.
The family home allowance
What many people don’t realise is that if their estate includes their home and they have children or grandchildren, then they are entitled to an extra tax-free allowance under the residence nil-rate band (RNRB), also known as the family home allowance. On April 6th this additional allowance was increased from £100,000 to £125,000, bringing many homeowners’ total tax-free allowance to £450,000.
How does the nil-rate band work?
The family home allowance is an individual tax allowance. This means that each qualifying individual is entitled to it, so if you have a partner, then between you, you could be able to pass £900,000 on tax-free. Crucially this only applies if you are passing your estate onto your heirs, which only includes children (including fostered, adopted and step-children) and grandchildren.
How long will the family home allowance stay at £25,000?
Not very long. The good news is that the nil-rate band is set to increase by £25,000 every year until it reaches £175,000 in 2020/21. After that it will rise in accordance with the consumer price index on an annual basis.
What are the rules and restrictions?
Tax law is complicated and of course certain rules and conditions may apply. As with all major money matters, it’s a good idea to speak to your financial advisor about your own individual circumstances. However, here are some of the rules that often affect people:
- Unused RNRB can be transferred to your spouse or civil partner when you die.
- Only one property can qualify.
- The person leaving the property in the will must have actually lived in the home.
- The system is designed to give fewer benefits to large estates, with £2.5 million being the cut off point for any tax-free threshold.
- There is no tax-free allowance if the property is gifted to a direct descendent, rather than being left to them in a will.
What if I need to downsize?
Many older people need to sell the family home in order to find a property that better meets their practical needs or to fund long-term care. In recognition of this, people in this situation may be entitled to an extra inheritance tax known as the downsizing threshold. In order to qualify, you must meet the following criteria:
- The downsizing must have happened after 8th July 2015
- The property in question would have qualified for RNRB, had it stayed in the owner’s possession.
- Direct descendants are in line to inherit some or all of the estate.
The downsizing threshold is a particularly complicated area to navigate as the rules will vary due to your unique situation, so it’s essential to seek expert professional advice in this scenario.
If you would like expert advice about buying or selling a property in the Market Harborough area contact Naylors Estate Agency on 01858 450 020 to discuss your needs.