Inheritance Tax: Main Residence Nil Rate Band

Currently, the Inheritance Tax Act 1984 provides that the nil-rate band is £325,000.00.  Inheritance tax is charged at a rate of 40% on the chargeable value of an estate, above the normal rate value, after taking into account the value of any chargeable assets transferred, depending on whether or not there are any reliefs or exemptions available.

Where an estate qualifies for spouse or civil partner exemption, the only unused proportion of the nil-rate band when the first of the couple dies can be transferred to the estate of the surviving spouse or civil partner on or after the 9th October 2007  irrespective of when the first of the two dies.  The nil-rate band therefore can be up to £650,000.00.

There is currently no exemption for a residence or for assets to be transferred to children and other direct descendants.

The new measures were announced in July 2015 and introduced a residence nil-rate band (“RNRB”).  The RNRB will apply to deaths from the 6th April 2017 An additional £100,000.00 RNRB will be available.  This sum is set to increase incrementally by £25,000.00 per year so that by 2020/21 and additional £175,000.00 will be available.  The nil-rate band will be frozen at £325,000.00 throughout this period.  The spouses and civil partners who meet the various conditions and can transfer both types of unused bands between them, they will have combined total nil-rate bands and RNRBs of £1m (being £325,000.00 and £175,000.00 (£500,000.00) each).

It will be a condition that the deceased must have had a residence at death or, at least, have had a residence at some point after the new rules were announced on the 8th July 2015.  However, the position where tax payers have downsized or disposed of a property completely before death, does appear to be quite complicated and the new rules are not yet fully clear but it is a requirement that the deceased lived in the property at some point.  An investment property will therefore not qualify although if it was lived in and later rented out or vice versa, the property would qualify.  It is clear that the RNRB cannot be divided between different residencies and where a person has more than one residence the personal representatives of their estate can elect which residence the RNRB should apply to.

The second condition is the residence must be inherited by “direct descendants” who are defined as grandchildren, children, and further lineal descendants including stepchildren and adopted children.  The definition also extends to the respect spouses and civil partners of lineal descendants and also widows, widowers and surviving civil partners who have not remarried.

The new Rules are potentially very complicated and it is important to obtain legal advice on your particular circumstances before they come into effect from the 6th April 2017 onwards.

As highlighted above some of the details are not yet clear but what is certain is that the nil-rate band has not simply been raised to £1,000,000.00.

Once final legislation has been made on the topic we will be providing a further update.

Image by Alan Cleaver under Creative Commons