Increase in Inheritance Tax nil-rate bands

First published on 08 April 2020 by Alastair
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The tax year ended 5 April 2018 saw the introduction of the main residence nil-rate band which allows individuals leaving a home as part of their estate to increase their tax-free threshold for inheritance tax (IHT) purposes. 

This band is now £175,000 from 6 April 2020 (having initially started at £100,000) and no further changes to this amount are currently proposed. It means that when combined with the standard nil rate band (£325,000), individuals will be able to leave estates of £500,000 without incurring an IHT charge.  Both these bands can effectively be passed on to the surviving spouse, meaning that couples will be able have a combined estate of £1 million before IHT becomes a consideration.

Who qualifies for the main residence nil-rate band?

In order to qualify for this additional band, your home must be left to a direct descendant.  This includes the following:

  • A child, grandchild or other lineal descendant
  • A husband, wife or civil partner of a lineal descendant (including widows, widowers or surviving partner)
  • A child who is, or was at any time, your stepchild
  • An adopted child
  • A child fostered at any time
  • A child where you have been appointed as a guardian or special guardian when the child was under 18

Nephews, nieces and other siblings are now considered direct descendants.

The band is also reduced by £1 for every £2 that the value of an individual’s estate exceeds £2 million, meaning that there is no band available for those with an estate worth more than £2.35 million.

IHT when the nil-rate bands are exceeded

The value of an individual’s estate in excess of the nil rate bands is subject to IHT, however there are other reliefs available that can be used to reduce the taxable estate, e.g. Business Relief for qualifying interest and shares.

Currently, the standard rate of IHT is 40%.  A lower rate of 36% applies if an individual opts to leave a minimum of 10% of the net value of their estate to charity.

What can you do to reduce your IHT liability?

If you think that your estate may have an inheritance tax liability, there are a number of steps that can be taken in order to reduce the amount.  This is mainly done by starting to distribute your estate ahead of time, in a tax efficient manner.

If you are looking for assistance with inheritance tax planning, we at M&S have considerable experience advising clients on these matters and will be happy to help you review and implement tax efficient planning to give you peace of mind in this all too often neglected area of tax.

Christoper Leslie, Tax Senior 


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