An increasing number of families are being hit with a 40 per cent inheritance tax (IHT) bill when a relative dies. Rising house prices have pushed many estates over the £325,000 IHT-free entitlement, called the nil-rate band. In 2011-12 the government's inheritance tax (IHT) take was £2.9bn, but the Office for Budget Responsibility forecasts it will rise to £4.7bn in 2016-17 and £6.2bn in 2021-22.
However, the introduction of the residence nil-rate band this week should help some families at risk of incurring IHT. The residence nil-rate band will boost your individual IHT-free entitlement by £100,000, upon death, if you plan to leave a family home to children or grandchildren. And this allowance will rise by £25,000 each year over the next three tax years, so that it will be £125,000 per person in 2018-19, £150,000 per person in 2019-20 and £175,000 per person in 2020-21.
Married couples or those in a registered civil partnership are allowed to pass assets to each other during their lifetime or when they die without having to pay IHT, no matter how much they pass on. Additionally, if one spouse dies without using their nil-rate band or residence nil-rate band allowance, the surviving person can claim up to 100 per cent of their spouse's allowance. This means a married couple have a combined nil-rate band allowance of £650,000. And by 2020, when the full residence nil-rate band has come into force, couples will have an additional £350,000 available to them. This will allow them to pass on a £1m family home to direct descendants - such as children, grandchildren, adopted children, step-children or foster-children - completely IHT-free. Spouses of direct descendants, such as sons and daughters-in-law, are also eligible beneficiaries. However siblings, nieces and nephews, and other relatives are not.