Despite the turmoil caused by economic uncertainty surrounding Brexit, figures show that the housing market in Scotland has continued to flourish. The average house price in Scotland rose by 2.4 per cent in 2018. The total volume of sales in 2018 also increased from those seen in 2017. While there are always exceptions in particular sectors or locations, the market generally appears to be performing strongly, with further growth predicted over the next five years.
With the Scottish housing market performing well, it is important to consider the implications this may have on planning for the future. Increased house prices can lead to higher Inheritance Tax bills, and it may be well worth your while taking advice now on how to prepare for this and reduce your overall liability.
The residence nil rate band
The prolonged increase in house prices across the UK prompted new legislation to be passed which increased the tax-free allowance to be set off against the value of your home. The Residence Nil Rate Band began to take effect from April 2017, with an additional allowance of £100,000 being made available to be used to offset tax that would have been charged when a primary residence is passed to a direct descendant. This relief is being gradually increased year on year until 2020 when the additional tax-free amount will be £175,000.
Once the full value of the relief can be claimed in 2020, a married couple could claim a combined Nil Rate Band amount of up to a total of £1 million (each couple contributing their own personal Nil Rate Band of £325,000 and an additional £175,000 offset against the value of the family home).
However, there are a number of limitations of the relief which may mean the benefits received by many families are limited.
Limitations of the new legislation
You can only qualify for the relief if your property is passing to "direct descendants" on death. Under the legislation direct descendants are classified as children, grandchildren, stepchildren, adopted children or fostered children. Your property must be passing to one of these groups on death, or on second death if you are a married couple.
Property that passes into a Discretionary Trust on death for the benefit of any direct descendants will not qualify. This is because the property has to be becoming part of the direct descendant's estate. However, property which is being held in “Liferent Trusts” for the ultimate benefit of direct descendants will qualify for the relief.
The relief is also only available on estates under £2 million. Once an estate is over this amount, the relief tapers by £1 for every £2, and this means by 2020, if your estate is worth over £2,350,000, it will not qualify for any Residence Nil Rate Band relief.
Take advice now to make the most of reliefs available
With these new rules providing opportunities to reduce your future Inheritance Tax bill, it is important to take advice now to ensure maximum benefit.
It is advised to review your Will regularly to ensure it is drafted in the best possible way in light of changes to legislation. This is particularly important where Wills make use of Discretionary Trusts. While these types of Trusts provide many benefits, they may prevent you from claiming certain tax-free allowances on death.
With estates that are worth over £2 million, it is worth taking advice to determine whether the value of the estate can be reduced below this figure to take full advance of tax-free allowances available.
Finally, if you are considering downsizing, it is important to take advice on how to reinvest the sale proceeds to ensure they can receive relief later down the line.
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