Inheritance Tax on your Family Home: will you pay 40% or 0%?

Purchasing your family home may well be the most significant investment you make. Why pay Inheritance Tax (IHT) on its value a 40% on death, when a rate of 0% could be available with a carefully planned Will which considers the complexities of IHT law?

On 6th April 2017 the government introduced a new IHT rate of 0% which applies to your home in limited circumstances. Put simply, to qualify your home must be inherited directly by lineal descendants which in some circumstances includes stepchildren. The 0% rate of IHT known as “Residence Nil Rate Band” (RNRB) will apply to an interest in a qualifying residence up to a value of £175,000 by 6th April 2020. The benefit of RNRB is being introduced in annual stages and this year is worth £125,000. As the rate is available to each owner, it is quite likely that the RNRB will be worth £350,000 to many families, resulting in a potential IHT saving of £140,000. There are some restrictions on availability of the RNRB connected with an individual’s overall financial worth, but for those with estates up to £2,000,000 it is generally available without incremental reduction.

Unless your Will provides for direct inheritance of your in an interest in a family home to children or grandchildren with an age given for them to receive it, for example at age 21 or 25, rather than 18, then the 0% rate may well be lost. Similarly, for those Wills which contained nil rate band discretionary trusts, popular until 2007, if the Will Trust contains an interest in the family home (which typically they did) then because inheriting the family home is not direct, the RNRB is unlikely to be available.

When buying your home at any time now, given the changes introduced by RNRB, you must check that your Will does not deprive your family of this valuable IHT benefit. Getting these arrangements wrong can mean your family pays £140,000 IHT when in many circumstances the tax might otherwise be £0.

Okells FrancisLaw has an established Private Client practice which has delivered the best capital taxes outcomes for its clients over many years. Our experienced lawyers can explain whether RNRB will be available to your family, even if the family home has been sold or made the subject of a gift before death. We can show you how to safeguard the benefit of RNRB and give you the best assurance available that your valuable assets will not be subject to IHT needlessly, that they will not be lost in the event of a future relationships, insolvency or in paying for care.

To discuss your options call Andrew Morris or Chris James on 01594 842242/01989 762009, or email: