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Residence nil-rate band part 1

Published  01 March 2022
   8 min read

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.

Key facts

  • The residence nil-rate band was introduced from 6 April 2017.
  • It is available to estates where the person dies after 6 April 2017 provided certain conditions are met.
  • 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.

Plain sailing

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:

  • Leaves an interest in a residential property, which has been their main residence at some point, to their direct descendants on death.
  • The direct descendants are children, which includes stepchildren, adopted and foster children, and their direct descendants.
  • May include the spouse or civil partner of a direct descendant, or a surviving spouse or civil partner, if they have not remarried at the time of the deceased’s death.

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.

 

The residence nil-rate band increase each tax year

Tax year Resident nil-rate band increase  Total inheritance tax allowance
2017/18 £100,000 £425,000
2018/19 £125,000 £450,000
2019/20 £150,000 £475,000
2020/21 £175,000 £500,000

Source: gov.uk

Manoeuvring money

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.

Size matters

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.

Disclaimer

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.