On the 6 April 2017 the residence nil-rate band was introduced. This is an additional threshold for inheritance tax planning above the current £325,000 threshold.
The simplest approach would have been to raise the main inheritance tax nil-rate band by £175,000 to £500,000. However, the rules have created more complexity.
The residence nil-rate band is available to estates where the person dies after 6 April 2017 and:
It was phased in over four years, so the magical £1 million inheritance tax threshold for a married couple, £500,000 each, became a reality in April 2020, see below table.
|Tax year||Resident nil-rate band increase||Total inheritance tax allowance|
The amount of the residence nil-rate band personal representatives can claim is the lower of the net value of the interest in the property, or the maximum amount of the band. The amount is limited to one property, with personal representatives nominating which property should qualify where there is more than one property in the estate.
Any unused residence nil-rate band amount cannot be carried across to another qualifying property, and property that has never been a residence of the deceased, such as buy-to-let properties, will not qualify.
Any unused proportion of the residence nil-rate band may be transferred to a surviving spouse or civil partner where the survivor dies on or after 6 April 2017, regardless of when the first spouse died. Where the first death occurred before 6 April 2017, the residence nil-rate band is deemed to be £100,000, so the survivor’s estate will benefit from a 100% uplift.
It is crucial to consider the effect of any tapering of the inheritance tax allowance. If the net value of the estate (the value after liabilities but before reliefs and exemptions) is above £2 million, the residence nil-rate band is reduced by £1 for every £2 above that amount.
If the estate of the first to die is £2.35 million in 2022/23, they will lose all of the current £175,000 resident nil-rate band. For second deaths after 2020, where no residence nil-rate band was claimed on the first death, an estate of anything over £2.7 million could potentially lose both residence nil-rate band amounts of £175,000.
There are what is known as the downsizing provisions. This is where all or part of the residence nil-rate band might be lost because the deceased had downsized or ceased to own a residence on or after 8 July 2015. The residence nil-rate band will still be available provided the deceased left the smaller residence or equivalent assets to direct descendants.
What could have been a simple solution has not turned out that way, raising a number of questions and concerns for advisers and their clients. As ever, quality financial advice is paramount to ensure people are not left out of pocket.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.