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New laws introduced by the Government from the tax year 2017/18 onwards allowed married partners to pass on up to £1 million worth of value in their family home, as long as it was passed to direct descendants. However, since the law has been introduced, some have found themselves worried that some of their loved ones may be missed out.
As the law currently stands, the first £425,000 of an estate can be passed on without incurring tax. This is made up of the £325,000 universal threshold, plus an added Residence Nil Rate Band (RNRB) – an exemption that provides a further Inheritance Tax (IHT) allowance if you pass a family home on to direct descendants.
RNRB was introduced in the Spring budget 2016 and has been phased in over the past four years. From April 2020, RNRB will rise to £175,000. Add that to the £325,000 IHT threshold and suddenly, as long as a family home is contained within an estate, you’re looking at up to £500,000 - or £1 million per married couple – which can legitimately be passed to direct descendants.
However, some fear they are missing out. In an article recently published in the Times, Mrs Errington, who had been married to her husband Willian for 29 years, was concerned that if she were to pass away before him, that her estate may not necessarily pass to William’s children – her stepchildren.
Technically, William’s children are not Mrs Errington’s direct descendants in this case, so she is worried that they may not benefit from either inheritance or the RNRB if she were to die first. Mrs Errington mentions in the article that, with a property worth around £400,000 and cash savings of about £100,000 in the bank, RNRB would be hugely beneficial.
However, whilst step children are a technicality, in the eyes of the law, they would still count as Mrs Errington’s direct descendants – so there would be no need for her to worry. In fact, what is defined as a “direct descendant” is surprisingly broad. As well as being a child, this could be a grandchild or indeed any other lineal descendant of a husband, wife or civil partner, and includes adopted children too.
Despite this rather generous tax break from the Government that could be very beneficial to families after the death of a loved one, many people are unaware of this tax relief which must be claimed by the executors. It is essential to structure your assets appropriately and also to ensure that your will is correctly worded. As straightforward as this seems there are a lot of potential pitfalls, particularly if your estate is worth more than £2 million. It is therefore highly recommended that you seek advice. Careful planning and making a will ensures your family will inherit what is rightfully theirs, and that your wishes are respected.
If you would like some further information or advice relating to your will, update or draft a completely new will, contact Downs Solicitors to see how we can help