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Inheritance tax property changes

By Gareth Shaw

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Inheritance tax property changes

Find out how the 2017 inheritance tax property rules work, and how the main residence nil-rate band allows you to pass on £1 million tax-free.

From April 2017, the amount you can pass on to your loved ones without having to pay any inheritance tax is getting a significant boost. In just a few years time, married couples and civil partners will be able to pass on as much as £1 million without their heirs being hit by a big tax bill.

This means that, individually, you'll be able to pass on an extra £175,000 free of inheritance tax by 2020. But crucially, you'll only get this extra tax-free allowance if what you're passing on - your estate - includes your home. 

In this guide, we explain exactly how the inheritance tax property changes will work and all the rules surrounding the new 'main-residence nil-rate band', as it's officially known. 

Why are there changes to inheritance tax for property?

Every person can pass on £325,000 before their heirs pay inheritance tax, which is 40% on anything above that amount. This is called the inheritance tax 'nil-rate band'.

If you're married or in a civil partnership, however, you can inherit any unused allowance from your husband, wife or partner. That means that married couples and civil partners can pass on £650,000. 

We've explained how this works in our guide to inheritance tax for couples.

Most people's estate - what they are passing on to their heirs - includes a property. And because property prices have been rising rapidly over the past few years, the government is giving people an extra allowance to prevent more people falling into the inheritance tax trap. 

Crucially, you only qualify for this new allowance is your estate includes a property that you've used as a home at some point in your life. 

Find out more: Discover how much your property is worth with our interactive map

How much can I pass on under the inheritance tax property changes?

The increase to the nil-rate band will be happening gradually between April 2017 and April 2020. The table below shows how your inheritance tax allowance will increase over the next few years. 

Inheritance tax property thresholds
Tax year Nil-rate band Residence nil-rate band Total for individuals Total for couples
2017-18 £325,000 £100,000 £425,000 £850,000
2018-19 £325,000 £125,000 £450,000 £900,000
2019-20 £325,000 £150,000 £475,000 £950,000
2020-21 £325,000 £175,000 £500,000 £1,000,000

So, starting in April 2017, you'll be able to pass on an extra £100,000 per person tax free if your estate includes your main home. 

Each year, this new allowance will rise by £25,000 until April 2020, when you'll be able to pass on an additional £175,000. This means that individually, you can pass on as much as £500,000 tax free.

As married couples and civil partner's can inherit any unused allowance from their spouse, a total of £1 million can be passed on tax free.

And after 2020, the plan is for the main residence nil-rate band to increase annually with inflation. But we can't tell you what that is yet! 

Who can inherit my estate and benefit from the new inheritance tax property allowance?

The government's rules state that only 'direct descendants' of people who have died can benefit from the new main residence nil-rate band. 

Direct descendants are described as:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Great-grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted children
  • Foster children
  • Children who were under the guardianship of the people passing on their estate

This means that nephews, nieces, siblings and other relatives will not benefit from the new allowance if a home is passed on to them. 

What does 'main residence' mean for the inheritance tax property allowance?

The main residence nil-rate band applies to only one home. It must be included in your estate (ie it's something that you are passing on) and you need to have lived in it at some stage in your life. 

If you own more than one home, the executor of your estate can nominate which one can be used against the inheritance tax property allowance. 

The good news is that you don't have to have lived in or owned the property for a minimum time - it can be any property you've lived in at some point. 

The home doesn't even have to be in the UK, but whether or not your heirs pay UK inheritance tax depends on your 'domicile' at the time of your death. Find out more in our guide to living overseas and inheritance.

But if you're a landlord, and you've only ever rented out a second (or third or more!) property that you own, this does not qualify for property allowance.

My estate is worth more than £2 million. Does it qualify for the inheritance tax property allowance?

If you have a larger estate, the main residence nil-rate band, and therefore the amount you can pass on tax-free, reduces gradually. This is technically called a 'taper'.

For every £2 that your estate is over £2 million, the new property allowance is reduced by £1. So, if your estate is worth £2.2 million in the 2017-18 tax year, you'll lose the entire main residence nil-rate band. 

The table below shows the size of estate when the entire nil-rate band is lost.

How the inheritance tax allowance is reduced for estates over £2 million
Tax year Main residence nil-rate band Size of estate when all nil-rate band is lost
2017-18 £100,000 £2.2 million
2018-19 £125,000 £2.25 million
2019-20 £150,000 £2.3 million
2020-21 £175,000 £2.4 million

I'm not married. Can I still qualify for the new inheritance tax property allowance?

If you are single and have a property in your estate, your heirs will benefit from the main residence nil-rate band. 

This means you'll have the £325,000 nil-rate band, plus an extra £100,000 in 2017, rising to £175,000 in 2020.

But unmarried couples will not be able to inherit their partner's unused nil-rate bands which, in effect, doubles the amount that can be passed on. 

By 2020, married couples and civil partners will be able to pass on £1 million inheritance tax free, whereas unmarried couples will only be able to pass on £500,000.  

What happens if I've downsized my home? Do I still qualify for the allowance?

One of the benefits of the inheritance tax changes for property is that people who have sold their main home and bought a cheaper property can still benefit from the new allowance.

The executors of your estate will need to work out what's technically known as your 'downsizing addition'. This is the amount of the main residence nil-rate band that you would have 'lost' by moving to a cheaper home.

You work this out by calculating the proportion of the nil-rate band you would have received on your original property and your new home. The government has published a number of examples showing how this works.

However, the downsizing addition only really applies if the value of your home when you die is worth less than the main residence nil-rate band at the time of your death.

The executors of your estate have two years following your death to claim your downsizing addition. It would be helpful to make a note of when you sold your home, and what was left after you downsized, so that your executors know exactly what to claim.

  • Last updated: March 2017
  • Updated by: Gareth Shaw
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