The New £1m Inheritance Tax Allowance
In the wake of the 2015 General Election, the Conservative Party confirmed it would deliver on its Manifesto promise that parents could pass their property up to the value of £1m to their children free of Inheritance Tax, thanks to a new ‘family home allowance’.
The allowance is called the Resident’s Nil Rate Band (RNRB) and took effect in April 2017. By 2020/21 it effectively adds £175,000 to each parent’s nil-rate band (currently £325,000) in respect of their main residence, bringing the total that may be transferred IHT-free on the second death to £1m.
An estate will be entitled to the RNRB if:
An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home or sold or given away their home after 7 July 2015, provided the deceased left the smaller residence or assets of equivalent value to direct descendants.
The RNRB allowance
The maximum amount of RNRB will increase every tax year as follows:
For later years, the amount of the RNRB will increase in line with the Consumer Prices Index. Any unused RNRB can be transferred to the deceased’s spouse / civil partner’s estate. This can also take place if the first of the couple died before 6 April 2017 (even though the RNRB wasn’t available at that time).
The definition of direct descendant
For RNRB purposes, a direct descendant of a person is:
Example case studies
Mr A dies in the tax year 2020 to 2021 and leaves a home worth £300,000 and other assets worth £190,000 to his children.
Estate value £490,000
Less RNRB £175,000
Remaining estate value £315,000
Less NRB £315,000*
Value that IHT is due on £0
*£10,000 of NRB is unused and can be transferred to the spouse.
Mrs B dies in the tax year 2020 to 2021 leaving a flat worth £100,000, and other assets of £400,000 to her son. She leaves the rest of her assets of £500,000 to her husband; these are exempt for IHT purposes.
Estate value £500,000
Less RNRB £100,000*
Remaining estate value £400,000
Less NRB £325,000
Value that IHT is due on £75,000
*£75,000 of RNRB is unused and can be transferred to the spouse.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Contains public sector information licensed under the open Government Licence V3.0.
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