So, how will it work and who will benefit? For starters, every individual, regardless of marital status, the type of assets in your estate, or who is inheriting from you, has a nil rate band of £325,000 above which your estate would be taxed at 40 per cent. If you are married or in a civil partnership at the time of your death and leave your estate to your spouse/ civil partner, your estate will be exempt and you will not use up the nil rate band. The unused nil rate band can then be transferred to your spouse/ civil partner’s estate on their death (or it can be transferred to your estate if you have been widowed), giving an additional £325,000 on top of their own allowance of £325,000. The value of the estate would need to be more than £650,000 before inheritance tax is charged.
The residence nil rate band kicks in if, for deaths after 6th April 2017, your estate includes a home and you are passing it on to direct descendants, and the value of your estate is not more than £2 million. For the tax year 2017-18 the residence nil rate band is £100,000 and this will increase by £25,000 each year until 2020-21 when it will be £175,000 (after which it will increase in line with inflation). Again, this can be transferred to a surviving spouse/ civil partner’s estate, potentially adding an extra allowance of £350,000. If you have been widowed, regardless of how long ago, this can be transferred to your estate. Add this to the £650,000 and you have the magic £1 million. But not until 2020, for 2017-18 the maximum combined allowances will total £850,000.