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Inheritance Tax update: Additional Residence Nil Rate Band

Currently when a person dies, the first £325,000 from their estate is free from Inheritance Tax (IHT).  This is the 'nil rate band' (NRB) allowance. The NRB can be reduced by certain gifts made in the 7 years prior to death. For married couples or couples in a civil partnership, upon the death of the first spouse, the allowance can be transferred to the surviving spouse so that upon the second death, there would be a total NRB allowance of £650,000 between them which can be applied to the surviving spouse’s estate when he or she dies.

However, as of 6th April this year, an additional NRB will come into force known as the 'residence nil rate band' (RNRB) allowance. This will mean that £100,000 of a person's house value will be exempt fromIHTif it is gifted to 'lineal descendants' (direct descendants i.e children, grandchildren).  However, step children and adopted children (who are treated as children of both the natural parent and step/adoptive parent) and foster children can also be classed as lineal descendants.

Furthermore, the £100,000 threshold is due to increase every year up to 2020 by £25,000 so that by 2020/2021, there will be a RNRB of £175,000.  The NRB can then be applied to the balance of the value of the property and/or the value of the estate.

The new law will also include a 'down sizing provision' so that where a residence is sold or no longer owned (i.e to pay for residential care home fees) after July 2015, the RNRB will still be available. 

Another point to note is that if a married person or person in a civil partnership dies and they pass their property to their partner, 100% inheritance tax relief applies to the gift (as long as the surviving spouse is domiciled in the UK).  Any unused RNRB can be transferred to the surviving spouse to be applied to their estate upon their death. This is irrespective of when the first spouse died, as long as the surviving partner dies after 5th April 2017.

Exclusions

There are some exclusions, however.  The property must have been the deceased residence at some point. If a person had more than one property only one home can attract the RNRB.

For estates that are over £2,000,000, (even if actual property is worth much less) the RNRB will be reduced by £1 for every £2 that the estate is valued over £2,000,000.

If you would like further information about this or any other private client matter, please contact us to speak to one of our private client solicitors or use the contact form on this page.