£1 million of your estate is Inheritance Tax free – but not for everyone!

The amount paid in inheritance for April 2010 to December 2021 was £4.6bn, according to HMRC statistics.  Noting that this is £0.6bn higher than in the same period a year earlier it is suggested that one of the key factors behind the latest hike in inheritance tax receipts is the fact that both the nil rate band and residence nil rate band have been frozen until at least April 2026, resulting in many families receiving an increase of inheritance tax bills as more estates are brought into scope on the back of rising property and share prices.

Previously, the nil rate band rose broadly every year in line with inflation. However, the £325,000 nil rate band, introduced from April 2009, has not changed since then. The value of an individual’s estate in contrast has continued to rise, pushing more and more people into a position where inheritance tax is payable on their estate when they die.

The introduction of the residence nil rate band (phased in from 2017/18) was meant to alleviate this to some extent, with the promise of £1 million inheritance tax free. However, how the £1 million is made up and the fact that the residence nil rate is not always available were not communicated effectively, leaving many individuals confused about their position.

When is the full £1 million nil rate band available?

The £1 million total nil rate band is actually only available if:

• you were married and you are the surviving spouse,
• the first spouse to die left all their estate (or all bar exempt assets or those qualifying for 100% tax relief) to you,
• you have children or other lineal descendants,
• the value of your home (or equivalent assets) is at least £350,000, and
• the total value of both the deceased and surviving spouses estates at death are £2 million or less

This is because as an individual, you are only definitely entitled to the £325,000 nil rate band.

Your executors can claim your deceased spouse’s nil rate band on your death, but only to the extent this has not already been used. This takes your combined position to £650,000, inheritance tax free.

As the residence nil rate band requires the main home (or equivalent value) to be left to direct descendants, as a couple you must also have children.

Your home must also be worth at least £350,000 (or was pre-downsizing, subject to the downsizing conditions) and assets of at least this value must have been left to lineal descendants, in order to qualify for the full £175,000 each. If it is not, the residence nil rate band that can be claimed is restricted.

Finally, if your estate is worth more than £2 million the residence nil rate band is tapered by £1 for each £2 the estate exceeds this threshold. As such, if your estate totals £2,350,000, no residence nil rate band would be available at all.

In modern society, where couples often cohabit or do not have children, the fact they don’t qualify for the full £1 million can come as a surprise. If their wills are not structured in the right way, it can also mean they pay significantly more inheritance tax than they would had the wills included slightly different wording.

Similarly, for those with a modest family home who have significant savings they intended to pass on, when the children have to pay a substantial amount of those savings across to HMRC, this can be quite distressing.

If you would like to check your inheritance tax position and whether you should be structuring your wills in a different way in order to minimise your inheritance tax exposure, please do contact Gemma Hedges on 023 8046 1259.