Inheritance Tax – Residence Nil Rate Band

A new Inheritance Tax allowance comes into force on 6th April 2017. This will apply to property left to direct descendants. The Residence Nil Rate Band, as the new relief is called, means that from this year, a new tax free allowance will apply to a property left by a deceased person to a descendent. If there is more than one property in the estate, the executor can decide which property is to be allocated for this purpose.

This allowance starts at £100,000 and will rise in £25,000 blocks over the next 4 years until, in the tax year 2020/21, it will stand at £175,000. If the property is held in joint names of a married couple or civil partners, each of the parties enjoys this relief - and it’s transferrable from one to the other on death if it’s not been used up.

Here are the basic rules. The Residence Nil Rate Band will apply if the:

  • individual dies on or after 6 April 2017
  • individual owns a home, or a share of one, so that it’s included in their estate
  • individual’s direct descendants such as children or grandchildren inherit the home, or a share of it, and
  • The value of the estate isn’t more than £2 million

Direct descendants include, the children, grandchildren and further lineal descendants of the deceased. They also include the spouse or civil partner of a direct descendant. Also included are step children, adopted children, fostered children and children of whom the deceased was guardian.  You can find an outline of what are considered to be descendants on the HMRC website. You can click here to view this information.

Direct descendants don’t include nephews, nieces, siblings and other relatives who aren’t included in the list above.

The Residence Nil Rate Band is in addition to the current Inheritance Tax (Nil Rate Band) threshold of £325,000. This is also transferrable between spouses or civil partners if it is not exhausted on death.

The total Inheritance Tax allowances available to married couples and civil partners from the tax year 2020/21, will be £1 million – and after that the allowances will increase in line with inflation (as measured by the Consumer Price Index).

There are a number of helpful case studies on the HMRC website ranging from the most simple and straight forward to the very complicated. You can view those case studies by clicking here.

Interestingly, if one spouse or civil partner dies before April 2017(whether or not they owned a share of the property or had already passed a share to children), the survivor will be able to use both of their family home allowances when he or she dies.

If you have a Will, you need to make sure it’s up to date so that you can take advantage of this tax-free allowance. If you don’t have a Will, you need to make one now to ensure you can decide who will benefit from this allowance.

Inheritance Tax planning is a complex process and we recommend this be undertaken by an expert in this field.

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