If an estate is left to beneficiaries other than to a surviving spouse or civil partner on death, inheritance tax at 40% is paid on amounts gifted over £325,000 (this sum is known as the nil rate band or NRB).
From April 2017, an additional £100,000 residence nil rate band(RNRB) has become available to deduct from a person’s estate where this includes a property, in addition to the current NRB, before inheritance tax is due. (By 2020-21, the RNRB will be £175,000).
To qualify for the RNRB, the property at some point must have been the deceased’s residence. The residence must be inherited by direct descendants such as children.
If the net value of the estate exceeds £2m, there is a reduction in the value of the RNRB.
There is no requirement that the property is the tax payer’s main residence to qualify but it should have been the person’s residence at some point. The RNRB excludes buy to let properties. The new rules also contain provisions where a tax payer ‘downsizes’.
Question of the Month:My wife and I own our home together. I have children from a previous marriage. I wish to leave my share of the home to my own children but I want to ensure that my wife is able to live in the matrimonial home if I die first. What can I do?
As you own your home jointly, you will need to find out if you own your home as beneficial joint tenants or as tenants in common. In the former case, on the death of the first joint owner, the property is automatically transferred to the surviving joint owner. If the owner of a property holding as tenants in common dies, there is no automatic transfer to the survivor. If required, it is quite easy to convert the ownership from beneficial joint tenants to tenants in common. Once the property is held as tenants in common, by your Will, you can gift your half share of the property to trustees for them to hold for your wife for life, with remainder to your children. This type of arrangement does have tax consequences and I do recommend that you obtain professional advice before proceeding.