In the last of a series of planned increases, the residence nil-rate band is set to change on 6 April 2020, from its current level of £150,000 to £175,000 for 2020/21.

If you're not familiar with the complex system of inheritance tax, this won't mean much to you - but for anyone inheriting a family home, it could make a big difference to the amount of tax paid on the estate.

How the band works

When someone dies, there's usually no inheritance tax to pay on the value of their estate up to £325,000. This is because each individual has a nil-rate band, where estates up to this threshold are tax-free.

Over the years, more people's estates have become likely to exceed this band - largely because of increasing values of residential properties.

For this reason, the residence nil-rate band was introduced, which works on top of the existing £325,000 nil-rate band, and applies when someone's main home is passed on to their direct descendants.

In 2017/18, when the allowance was first introduced, the band stood at £100,000. Since then, it has increased by £25,000 every tax year.

In 2020/21, it will increase to £175,000, meaning it may be possible to inherit an estate worth up to £500,000 without being liable for inheritance tax.

After April's increase, the residence nil-rate band will increase each year in line with the Consumer Prices Index rate of inflation.

Which properties are eligible?

To qualify for the residence nil-rate band, the property being passed on must have been the deceased individual's residence at some point.

If they owned a property but never lived in it, this would not qualify for the additional band.

It must be left in the deceased's estate to their direct lineal descendants, such as children or grandchildren. This also includes step-children, foster children and adopted children.

For high-value estates, a taper applies to the residence nil-rate band which gradually decreases the tax-free amount.

If the net value of the estate is above £2 million, the band will be decreased by £1 for every £2 over that amount.

Future changes

Depending on the tax changes announced in the next Budget, which is set to take place on Wednesday 11 March 2020, there's a chance that the current inheritance tax system could be reformed or simply abolished altogether.

In October last year, Chancellor Sajid Javid said there was a "real issue" with inheritance tax, and that it was "on his mind".

The Office for Tax Simplification has also called for reform to simplify the design of the tax, including changing lifetime gift rules and business exemptions.

Talk to us about inheritance tax.