Inheritance Tax (IHT)– The Residence Nil Rate Band and Downsizing
In this tax blog, we will discuss the newly introduced (from 6th April 2017 onwards) residence nil rate band and what this will mean for our clients.
What is the Nil Rate Band?
The nil rate band, also known as the inheritance tax threshold, is the amount up to which an estate has no IHT to pay. Each person’s estate can benefit from the nil rate band.
Everyone has their own nil rate band. This means that their estate and taxable gifts are exempt from IHT up to a certain threshold – currently £325,000. Any part of the estate up to the threshold is chargeable to IHT at a rate of 0%. Any part of the estate that exceeds the nil rate band threshold is chargeable to IHT on death at 40%.
The Transferable Nil Band
It is possible for the unused proportion of the nil rate band of the first spouse or civil partner to pass away to be transferred to their survivor. This means that any part of the nil rate band that is not used when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use on their later death.
Where the whole amount is passed to the surviving spouse or civil partner, the nil rate band of the survivor will be worth £650,000 (2017/18). If the deceased had made other gifts out of their estate, then the proportion of the nil rate band transferable is reduced proportionately.
What is the Residence Nil Rate Band?
The residence nil rate band is an additional nil rate band, which is available where a death occurs on or after 6 April 2017 and property in the estate which has been the deceased’s private residence, is left to direct descendants.
The residence nil rate band is set at £100,000 for 2017/18, £125,000 for 2018/19, £175,000 for 2019/20, and £175,000 for 2020/21.
As with the normal nil rate band, any unused portion is transferred to a spouse or civil partner on his or her death. If the spouse or civil partner of an individual died prior to 6th April 2017, the residence nil rate band will still be able to be transferred in full to the surviving spouse or civil partner, if his/her death occurred after the 6th April 2017.
The allowance is reduced by £1 for every £2 by which the value of an individual’s estate exceeds £2 million.
Availability of the residence nil rate band may be preserved where a person downsizes their property on or after 8 July 2015.
If at the date of death, the estate does not qualify for the full residence nil rate band, a downsizing addition may be available if the following conditions are met:
- The deceased disposed of a former home and either downsized to a less valuable home or ceased to own a home on or after 8 July 2015
- The former home would have qualified for the RNRB;
- At least some of the estate is inherited by direct descendants.
The amount of the downsizing addition will generally be equal to the amount of the residence nil rate band that is lost because the residence no longer forms part of the estate. Assets at least equal to the residence nil rate band plus downsizing addition must be left to direct descendants.
The HB Accountants tax team can assist you with any queries you have regarding the residence nil rate band, or any other tax questions.
Please do not hesitate to contact Amy Armitage, Tax Manager (firstname.lastname@example.org), with any queries you may have or for further information regarding this topic.