Inheritance tax: transferring unused family home allowance
25th January 2018
There are many ways to reduce your potential inheritance tax (IHT) bill - from giving to charity in your will, making gifts during your lifetime and passing assets to your spouse or civil partner.
The newest tool at your disposal is the family home allowance, the more informal name for the residence nil-rate band.
In a nutshell, it is a £100,000 nil-rate band that applies to property you pass on to a child or other direct descendant. The individual allowance will increase by £25,000 each tax year until it reaches £175,000 in April 2020.
Read about how it works in more detail.
One of the most useful features of the allowance is the ability to transfer any unused allowance to your spouse or civil partner.
So, if you are eligible for the allowance and don’t use it all, your partner can benefit from an increase to their allowance.
How transferring works
Any allowance that wasn’t used at the time of the first death is transferred as a percentage rather than an amount. This transferred allowance is calculated using the thresholds at the time of the second death.
For example, Bill dies in June 2017 when the allowance is £100,000. His widow Dot inherits his whole estate including his share of the family home.
As the home is passed to his wife, Bill does not use any of his allowance. So Dot potentially has 100% of Bill’s allowance to use, plus her own allowance.
Dot dies in June 2020 when the allowance is £175,000. She passes on the family home to her 3 children meaning her estate is eligible for the allowance.
The combination of Dot’s £175,000 allowance and Bill’s percentage (100% of £175,000) gives a family home allowance of £350,000.
It is also possible to claim before the allowance was introduced on 6 April 2017. If Bill had died in 2016, for example, Dot’s estate would still have been able to benefit from his unused allowance.
High value estates
An added complication is that the allowance is tapered on estates (not properties) worth more than £2 million. The reduction is £1 for every £2 of the estate worth more than £2 million.
This tapering can also reduce the percentage of the allowance available to a surviving spouse or civil partner.
For example, Bill’s estate was worth £2.1 million when he died in June 2017 and tapering reduced his allowance by £50,000.
As the allowance was £100,000 when he died, Bill’s allowance is £50,000 – or 50% of the allowance. It is this percentage which can be transferred to Dot’s estate.
When Dot dies in 2020, she has a £175,000 family home allowance plus an extra 50% (£87,500) from Bill, giving a combined total of £262,500.
How to claim
Transferring the family home allowance isn’t automatic – you have to apply for it by sending form IHT436 to HMRC.
Details you need include:
- IHT reference number for the deceased
- date and place of your marriage or civil partnership
- value of your spouse/civil partner’s estate.
What does this mean for me?
The family home allowance is a useful tool to help minimise IHT.
We can review your situation, discuss your eligibility and see if your will is structured to take advantage of the allowance. Get in touch to find out more.