Introducing the residence nil rate band

Introducing the residence nil rate band - a valuable additional relief for inheritance tax

The residence nil rate band was introduced to make it easier to pass on the family home to children and grandchildren without the burden of inheritance tax. It is effectively an additional inheritance tax nil rate band but differs from the basic nil rate band in that it is restricted to the value of the qualifying residential property, can only be used against the death estate (i.e. not lifetime gifts) and is subject to the property being inherited by lineal descendants.

The residence nil rate band is being phased in over a four year period, starting at £100,000 in the 2016/17 tax year and rising by £25,000 each tax year to reach £175,000 in the 2020/21 tax year. This makes it a very valuable relief and worth undertaking inheritance tax planning to attain the maximum benefit.

As for the basic nil rate band, where an individual has been predeceased by their spouse, the unused proportion of the residence nil rate band of the spouse who died may be transferred to the surviving spouse. When combined with the basic nil rate band (currently £325,000 per individual), this results in a potential total nil rate band for a couple of up to £1 million.

Where the value of an individual’s estate at death exceeds £2 million, restrictions to the residence nil rate band apply. In this situation, it may be worth making lifetime gifts in order to reduce the value of the estate and preserve the residence nil rate band.

Many individuals downsize their residence or, in some cases, sell and don’t replace their property, perhaps to take up residence in a care home. In order that they are not penalised for this, special provisions were introduced to help preserve the proportion of residence nil rate band that would have been available, had the individual died at the time that the property was sold.

Finally, it should be noted that the transfer of unused spousal allowances and the application of downsizing provisions are not automatic – a claim must be made by the personal representatives when dealing with the estate and time limits apply.

Rennie Welch LLP accepts no liability on the basis of this article and professional advice should always be sought based on personal circumstances. For advice or assistance with inheritance tax planning please contact Lynn Miller at Rennie Welch LLP either by email at lynn.miller@renniewelch.co.uk or by telephone on 01573 224391.