Structuring your estate correctly can lead to big savings if you understand the complexities of inheritance tax
Currently all individuals in the UK have a nil rate band of £325,000 each. This means that on death, if the value of your estate (all your cash, assets, investments and personal chattels) is less than £325,000 (or £650,000 for a couple) then your family does not need to pay any tax. If your estate is valued at over £325,000 (or £650,000 for a couple), then the remainder will be taxed at 40%.
Since April 2017, a new tax relief, known as the Main Residence Nil Rate Band has also been available which can be used to further reduce the tax payable on death. For the 2018/19 tax year, this exemption is £125,000 for each individual and will increase by £25,000 each year until 2020/21 when it will be £175,000.
Taking both the regular nil rate band and the main residence exemption together can mean that in the tax year 2020/21 an estate for a couple of £1 million could completely avoid IHT. Without having the main residence exemption available, an estate with the same value could have a tax bill of £140,000. Quite a saving.
If your joint estate is worth more than £2 million (after deducting any liabilities, but before any reliefs and exemptions), then you will lose £1 of the relief for every £2 over the limit. If your estate is valued in the tax year 2020/21 at £2.35 million then you will not be able to benefit from the main residence element is lost. The standard nil rate band of £325,000 is retained though.
You also need to make sure that your Will is properly worded to take full advantage. For example, a couple with a joint estate of £3 million could have individual estates of £1.5 million each. An estate of £1.5 million would qualify for the exemption on first death but if everything is left to the spouse then a £3 million estate on second death wouldn’t qualify.
As the name implies, the exemption applies to the deceased’s main residence. In other words, your home, and it only applies if you leave the property to direct descendants. To benefit from the Main Residence Nil Rate Band, the transfer must be on death, and can be made by Will, under intestacy or as a result of the rule of survivor-ship.
The Main Residence Nil Rate band can apply to:
- A property that was let out at the time of death, (as long as it had been used as the main residence at some point in the past)
The Main Residence Nil Rate Band will not apply to:
- Buy to let or holiday homes or other non-property assets. Buy-to-let properties which have never been used by the deceased as their main residence will not qualify.
- More than one property. If the deceased owns more than one property, personal representatives will be able to nominate which property applies.
If your Will calls for your home to be sold and the cash distributed to your beneficiaries, then some or all of the allowance could be lost if it is not passed to direct descendants. When downsizing, you can receive a credit on the previous more expensive home – if the proceeds continue to pass to direct descendants. Just be careful that your estate is structured correctly to take advantage of the reliefs available.
The Financial Conduct Authority does not regulate taxation and trust advice.
This article has been compiled in line with Wren Sterling’s understanding of current HMRC tax rates. Taxation rates may be subject to change in the future.