HM Insights

The new Residence Nil Rate Band allowance and how it affects inheritance tax liability

Recent changes to the legislation surrounding inheritance tax have made it more important than ever to take expert advice when thinking about your Will.

In the summer of 2015, George Osborne announced a new inheritance tax allowance relating to property. The Residence Nil Rate Band can help to protect an individual’s main residence from inheritance tax, provided various criteria are met.

Residence Nil Rate Band Inheritance Tax Allowance

Every individual is entitled to the existing Nil Rate Band for inheritance tax of £325,000 and this rate has been frozen until 6 April 2021.

What is the Residence Nil Rate Band?

The Residence Nil Rate Band allowance provides individuals with an “additional” nil rate band which can be used towards their home. With 1 in 5 estates including property or land, this is a potentially significant tax saving tool.

The Residence Nil Rate Band can only be used for a residence which has formed part of an individual’s estate during their lifetime. If there is more than one residence at the time of individual’s death, their executor can elect which property is to be covered. To use the Residence Nil Rate Band, your property must be “closely inherited.” This means it must be left to direct or lineal descendants (for example, children or grandchildren) or to a spouse or civil partner. In limited circumstances, property can be left to a Trust and still qualify for Residence Nil Rate Band relief. For example, property can still be left in a bare trust, an immediate post death interest trust, a disabled person’s trust or an 18-25 year old trust and qualify for the allowance.

Like the Nil Rate Band, the Residence Nil Rate Band is transferable between spouses and civil partners, even if the predeceasing spouse or civil partner did not own a property at the time of their death.

What kind of value does it cover?

The Residence Nil Rate Band will start at £100,000 per person from April 2017 and increase incrementally to a maximum of £175,000 by 2020/21. With careful estate planning and by ensuring you have the right Will in place it will be possible for couples to pass up to £1 million of estate tax free once the Residence Nil Rate Band is fully phased in.

Get in touch

Even if you have already prepared a Will, it is worth reviewing it to ensure you make the most of the tax allowances available.