Additional inheritance tax nil-rate band available

The July 2015 Budget brought some welcome news to homeowners. This was in the form of an additional inheritance tax nil-rate band available to homes if passed on death to a direct descendant (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

The value of this residence nil- rate band (RNRB) will be the lower of the net-value of the residential property (after deducting any liabilities such as a mortgage), or the maximum amount of the band. The maximum amount of additional nil-rate band (per person) will be phased in so that it is:

• £100,000 in 2017/18
• £125,000 in 2018/19
• £150,000 in 2019/20
• £175,000 in 2020/21

The maximum RNRB in 2020/21 will therefore be £1m and will increase in line with the Consumer Price Index (CPI) from 2021/22 onwards. Any unused RNRB will be transferable to a surviving spouse or civil partner where the second death occurs on or after 6 April 2017 - irrespective of when the first of the couple died. The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

However, the RNRB is not available to everyone and there is a cap on the value of estates that can benefit from the increased nil-rate band. Therefore, if the net value of the estate (after deducting any liabilities but before relief and exemptions) is above £2 million, the additional RNRB will be tapered away by £1 for every £2 that the net value of the estate exceeds that amount. This will mean that for taxable estates over £2.35 million only the normal £325,000 per person nil rate band will be available.

In terms of restrictions, the qualifying residential interest will be limited to one residential property. However personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a main residence of the deceased, such as a buy-to-let property, will not qualify. Similarly, the RNRB will not help to reduce any tax that may have been payable on a previous lifetime transfer that becomes chargeable as a result of death within seven years.

The existing nil-rate band will remain at £325,000 until the end of 2020/21.

For more details, please contact us