Inheritance Tax & Your Home – Could you be paying too much?

In 2017 new rules were introduced to allow home owners to a claim an additional allowance to reduce their Inheritance Tax (or IHT) liability.  This news came as a welcome relief to many homeowners wishing to pass their most prized asset to their loved ones.

“Claiming this allowance may not be straightforward” says Ben Holden Associate Solicitor of MacDonald Oates Wills, Probate & Trusts Team “many people may losing out by failing to meet the various conditions set by law”.

Ben sets out his guidance on the new rules and answers your frequently asked questions.

Will I have to pay IHT?

There are two bands for IHT; a nil rate band (or ‘NRB’) up to £325,000 and a 40% band for anything over that amount.  If the value of all your assets (known as your ‘estate’) is worth more than the NRB, then you will have to pay IHT on the excess.  The rate applicable in most cases is 40%.

Married couples can transfer their NRBs to one another to make a total allowance of £650,000.

I am a homeowner do I get an additional allowance?

You may be entitled to the ‘residence allowance’.  This is an additional allowance on top of the NRB. In this tax year (2018-19) the residence allowance is worth £125,000 (or £250,000 for married couples).  The allowance will increase to £150,000 in 2019-20 and to £175,000 in 2020-21.  Married couples, who are homeowners, may be able to claim a total allowance of £1m from April 2020 (£325,000 + £325,000 + £175,000 + £175,000).

What are the conditions for the residence allowance?

To claim this allowance, the following conditions must be met:

  • You must own a home
  • Your estate must pass to your descendants
  • Your estate must be worth less than £2m

The allowance can only be offset against your home and not other parts of your estate.  For example if you own a flat worth £100,000, your residence allowance will be £100,000 and not £125,000.

I have sold my home, will I lose my allowance?

No.  So long as the sale took place on or after 8 July 2015 you will be able to claim the residence allowance.

I own more than one home, will I lose out?

Your executors can nominate one property (this does not have to be your main residence).  The allowance, however, is only applicable against one property, not a combination of homes.

Also, the residence allowance is applicable to a dwelling house which has been your residence.  Therefore, it is unlikely to apply to a factory or an investment property.

Who are my descendants?

Your descendants are your children, grandchildren, great grandchildren etc.   The definition of child can include biological, adopted, step or foster.  Nieces and/or nephews do not count as descendants.

Wills that divide the estate between descendants and non descendants could risk reducing the available allowance.  For example if a Will left 60% to a child and 40% to a niece, only 60% of the residence allowance would be available.

Can I leave my property on trust and claim the allowance?

No.  The property must be inherited by a descendant.   There are some exceptions to this rule, for example if a parent leaves their estate on trust for their children to inherit at 18 years.

The exceptions are very limited.  If you are a grandparent you need to be careful – the exceptions that apply to parents may not apply to you.  In the above scenario if a grandparent had left their estate to a grandchild to inherit at 18 years, they may lose the allowance.

If any part of your estate is held on trust and/or passes to grandchildren, you should urgently review your Will.

My estate is worth more than £2m. Will I lose the allowance?

For every £2 over the £2m threshold, you lose £1 of the allowance.  If you are worth £2,250,000 you will lose all of the allowance.

Should I review my Will?

Yes.  An out of date Will leaving your estate on trust or split between ‘descendants’ and ‘non descendants’, could result in you paying unnecessary amounts of tax.

Do I need legal advice?

Yes.  Whether you are making a Will or dealing with a deceased person’s affairs, this is a complex area of law and expert advice is necessary.   As well as having to meet the above conditions, your executors will have to claim the allowance, using the correct procedure and within the set time frames. The allowance is not automatically deducted from your tax bill.

Get it right and this allowance could potentially save your estate £100,000.  Get it wrong and your loved ones could lose out.  If you need advice please speak to a member of our team on 01730 268111 (Petersfield) or 01730 816711 (Midhurst).

About the author

Ben Holden is an Associate Solicitor at MacDonald Oates LLP Solicitors.  He has over decade of experience in Wills and Probate law and is also a qualified member of the Society of Trust & Estate Practitioners.  Also, Ben is a Full Accredited Member of Solicitors for the Elderly.  Ben takes a pragmatic approach and prides himself in taking the time to understand his clients’ needs.