Changes to the Residence Nil Rate Band

A welcome increase in the Residence Nil Rate Band came into effect on 6 April 2018, a relief which is added to your Nil Rate Band for Inheritance Tax purposes.

The allowance has increased from £100,000 to £125,000 per person and will increase by £25,000 each year in April until 2020. By this point, the Residence Nil Rate Band will be £175,000 and may be added to your existing Nil Rate Band of £325,000. This will give individuals a tax free estate value of £500,000 and, as this is transferrable between married couples and civil partners, would total a £1 million Nil Rate Band for Inheritance Tax.

In order to qualify for the relief you must have lived in the property prior to your death and your property has to pass to “direct descendants” being your children and grandchildren (including stepchildren or adopted children). If the relief is not claimed on first death then it may be available for e transfer on second death (subject to qualifying conditions) at the rate applicable at the time of the second death.

There are, however, some restrictions on the use of your Residence Nil Rate Band.

The full relief can only be claimed on estates under £2 million. If your estate exceeds this amount, the relief tapers by £1 for every £2 of value in the estate. This means that if you were to die in this tax year with an estate worth over £2,250,000, it would not qualify for any Residence Nil Rate Band relief.

Conversely, if you own a property which is worth less than the Residence Nil Rate Band then you will only benefit from the relief up to the value of the property. For example if your property was worth £100,000 then you would only enjoy £100,000 of Residence Nil Rate Band relief. The relief can only be used against one property and any unused allowance could not be transferred to another property owned by you.

The Residence Nil Rate Band can also be lost if you leave your home to a certain type of Trust. For example, if you are leaving your property to a Discretionary Trust this will not qualify for the relief. This is the case even if the Trust is established for your married or civil partner, or your direct descendants. However, if you leave a share of your property in a Liferent Trust with your direct descendants as ultimate beneficiaries then this would qualify for relief on second death.

Relief can also still be used when downsizing or having to sell the home when going into care providing some of the funds pass to direct descendants.  It is important to keep records of this and any other gifts you have made and important to take legal advice before doing so.

For more information on this or to discuss how best to maximise your Nil Rate Band and reduce any potential Inheritance Tax liability please get in touch with our Private Client team.

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.