Resident Nil Rate Band for Inheritance Tax

In Summer 2015 the Government announced the introduction of a new nil rate band for Inheritance Tax, which came in to force on the 6^th April 2017. In addition to your standard nil rate band, which is currently £325,000, a further nil rate band is now available when you leave your home to your direct descendants. The additional “residence nil rate band”, as it is now known, is £100,000 but will increase by £25,000 each tax year until it reaches £175,000 on the 6^th April 2020. By this date, your estate can be valued at up to £500,000 and there will potentially be no Inheritance Tax to pay. If you are a married couple or in a civil partnership, your combined estates can therefore be valued at up to £1 million and there may not be any Inheritance Tax liability. As with all tax matters, however, there are complexities to the new residence nil rate band and there may be situations where you lose the ability to claim it.

You will only qualify for the residence nil rate band if you leave your property to your lineal descendants. This includes children, step-children, adopted children, foster children and remoter descendants such as your grandchildren and great-grandchildren. If you leave your home to anyone else then you will lose the residence nil rate band. This includes leaving your property to any other relatives, to friends and to certain types of trusts, such as discretionary trusts or even to your grandchildren at 21 years of age, for example.

Property that you own as an investment, such as a rental property, will not qualify. The residence nil rate band only applies to the home that you live in and if your home (or your share in your jointly owned home) is worth less than your residence nil rate band then you will lose the difference, as the residence nil rate band cannot be used in relation to your other assets.

For estates worth over £2 million the amount of residence nil rate band that can be claimed will reduce by £1 for every £2 over that threshold, until it is lost completely when your estate is valued at more than £2.2 million (rising to £2.35 million by the tax year 2020/21).

The new rules do permit you to downsize or sell your home (to move in to a nursing home, for example) and still benefit from the residence nil rate band, but this area is complex and professional advice should be sought.

As with your standard nil rate band, any unused residence nil rate band can be transferred to your surviving spouse or civil partner as a percentage of the residence nil rate band available when your surviving partner passes away.

It is clear, therefore, that whilst any additional nil rate band is to be welcomed, it makes obtaining professional advice about your Will and about the administration of an estate even more important. It would be terrible to realise that your loved ones could have avoided paying Inheritance Tax by you updating your Will or by dealing with an estate in a slightly different manner. Don’t lose out. Get advice.