Earlier this year, it was far from certain that the final increase to the residence nil-rate band would go ahead.
Such was the clamour for change to inheritance tax prior to the Spring Budget back in March, rumours were rife that this could be abandoned.
The £100,000 family home allowance, to use its other name, was introduced in April 2017 and has risen by £25,000 in each tax year since.
April 2020 marked the end of those incremental increases, with all future rises to be determined by the Consumer Prices Index rate of inflation.
But what is the residence nil-rate band, and how does it interact with the inheritance tax system?
How the residence nil-rate band works
When you die, the first £325,000 of your estate is usually not liable to inheritance tax as it is protected by the nil-rate band.
Over the years, increasing property values have seen more people’s estates exceed this threshold and have tax deducted at 40%.
That prompted the introduction of the residence nil-rate band, which works on top of the existing £325,000 nil-rate band.
For 2020/21, this band increased to £175,000 meaning it is possible for an estate worth up to £500,000 to be free from inheritance tax.
This makes it easier for you to pass on the family home to direct descendants tax-free.
What properties are eligible?
To use the residence nil-rate band as an estate planning strategy, the property must be your main residence at some point.
You must also have direct descendants to pass your home on to, usually children or grandchildren. Passing on your family home to stepchildren, foster children or adopted children also qualifies for the allowance.
When writing your will, you should include the instruction to pass on your family home to any of these descendants.
It is not possible to pass on your family home to any nieces or nephews, cohabitees or divorcees.
Be aware, though, if your estate is likely to exceed £2 million, the residence nil-rate band will decrease by £1 for every £2 over this threshold.
Transfers to spouses or civil partners
If you are married or in a civil partnership, any unused slice of the £325,000 nil-rate band can be added to the estate of the widow or widower. The same rule applies to the residence nil-rate band.
In theory, this allows couples to leave a family home worth up to £1m to their children or grandchildren free of inheritance tax.
If your spouse or civil partner passed away after 9 October 2007, you can pass on a family home worth up to £500,000 to direct descendants.
How is the residence nil-rate band claimed?
A formal claim must be made within 24 months of the surviving spouse or civil partner dying.
Many variables may come into play depending on your own personal circumstances, which is why we are perfectly placed to help.
We can claim the family home allowance as part of our inheritance tax and estate planning service.
That includes helping with drafting or updating a legally valid will, and where appropriate, acting as trustees or executors.
To find out more about what we can do to preserve as much of your wealth as possible, email us at firstname.lastname@example.org or call us on 0141 221 257.