As part of a stated intention to increase the overall inheritance tax allowance, the new allowance is designed with increased property values in mind.
At first sight, the new residence allowance may seem straightforward, but the final legislation will be extremely complicated.
At present, an estate is taxed at 40% on anything above the nil-rate band allowance of £325,000. Transfers between spouses/civil partners are exempt, and any unused allowance from the estate of the first to die can be transferred to the estate of the surviving spouse. This means that on the death of the second spouse, the amount of available allowance may be up to £650,000. The transfer of any unused allowance is not automatic - it has to be claimed.
For deaths after 5 April 2017, a new residence allowance of £100,000 will be available to qualifying estates. The new allowance will increase by £25,000 each year, until it reaches £175,000 in 2020/21.
The much publicised announcement has focused on the combined total of the allowances, which will be the standard allowance of £325,000 plus the residence allowance of £175,000 - a total of £500,000 for each estate - which for a married couple will be up to £1,000,000 on the second death.
Not all estates will qualify for the residence allowance. The requirements include:
Properties transferred into a discretionary trust will not qualify.
The residence allowance is limited to one property, but for estates with more than one residence, the executors can choose which property the allowance is to apply to, which will usually mean applying the allowance to the most valuable property. The allowance cannot be split between different properties.
The deceased must actually have lived in the property - the property must not simply have been an investment.
The final small print has not yet been clarified and there may be some last minute changes.
For more information, please contact Michael Knowles on 020 7665 0903.