My wife and I own a house as tenants in common. It is worth £150,000. When I die, I want to leave my half of the house equally to our two adult children. How does that work with regard to the new inheritance tax (IHT) allowance?
The residence nil-rate band is an allowance of up to £175,000, which is available for individuals who pass on a residence, which they have previously lived in, to direct descendants such as children or grandchildren. It effectively acts as an increase to the existing nil-rate band of £325,000 per person for IHT purposes.
The new band is being introduced in phases starting on 6 April 2017 at a rate of £100,000, rising to £125,000 from April 2018, £150,000 from April 2019 and to £175,000 from April 2020. If unused, the allowance can be transferred to a spouse or civil partner on death, meaning a couple could have a combined nil-rate band of £1 million from 2020.
You are deemed to own half of the house, with your share valued at £75,000. If you die and pass your share of the house to your children, this will meet the rules for passing to direct descendants. You can, therefore, benefi t from a residence nil-rate band of £75,000. As this is less than the total residence nil-rate band that could be available to you, any unused allowance will pass to your wife and will then potentially be available for her to use on her death.
Moneywise says: You should also stipulate in your will that your spouse has the right to continue living in the home.