Residential Nil Rate Band

For many years there has been much discussion around the Nil Rate Band for Inheritance Tax (IHT) purposes and the fact that it was not keeping up with the increase in wealth in the general population, which has to a great extent been fuelled by greater home ownership and increased house prices.

For those not familiar with the term “Nil Rate Band” (NRB), this is the first £325,000 of a person’s estate on death.  The term means that an estate up to a value not exceeding £325,000 (including the value of any gifts made in the 7 years leading up to death) is charged at 0%. Once an estate has exceeded the Nil Rate Band then the position, up to now at least, was that the remaining value of a person’s estate was then subject to an IHT liability charged at £0.40 in each pound.  

From 6th April 2017, with the introduction of a new Residential Nil Rate Band (RNRB), this position will change, albeit only for those who are parents whose estate includes a home or part of a home for IHT purposes and whose direct lineal descendants will receive an Immediate Post Death Interest (IPDI). Alternatively, a person who is married or has a civil partner, can leave their estate to them without losing their entitlement to the Residential Nil Rate Band provided that the estate of the surviving spouse or civil partner is also a qualifying estate for the Residential Nil Rate Band and the direct lineal descendants of the couple will receive an Immediate Post Death Interest (IPDI) in the estate of the surviving spouse or civil partner.

A person’s direct lineal descendants includes the person’s children (including adopted children), grandchildren, a child who is or was at any time the person’s step child or foster child and a child to whom the person was appointed guardian until the child reached 18.    It should be noted that those who are not parents and/or whose estate is not a qualifying estate or whose direct lineal descendants will not receive an Immediate Post Death Interest will not benefit from the change.

The new Residential Nil Rate Band is being phased in from 6th April 2017 and will be available to an entitled estate of a person who dies on or after that date or, if applicable, whose spouse or civil partner dies on or after that date.  If a person dies in the 2017-2018 tax year then their estate may qualify for the starting amount of up to £100,000. This amount is set to rise by an additional £25,000 in each subsequent tax year until the maximum possible level of £175,000 per qualifying estate is reached in the tax year 2020/2021.

In keeping with the current rules of IHT, a person’s unused Residential Nil Rate Band can be claimed for the estate of their surviving spouse or civil partner. Notwithstanding that a person may die before 6th April 2017, if their estate is left to a spouse or civil partner who dies on or after 6th April 2017 leaving a qualifying estate to the couple’s direct lineal descendants, then the unused Residential Nil Rate Band of the predeceasing spouse or civil partner may be able to be claimed for use in the estate of the surviving spouse or civil partner.  In such circumstances, on the 2nd death, if both estates are qualifying estates and both estates are entitled the maximum available Nil Rate Band (£175,000 per qualifying estate) and the full Residential Nil Rate Band (£325,000 per person), then the surviving spouse’s or civil partner’s estate could qualify for the maximum possible combined nil rate band for IHT purposes of £1m. It should be noted however that for estates which exceed the threshold of £2m in value, the entitlement to the new Residential Nil Rate Band will be gradually withdrawn by £1 for each £2 that this threshold is exceeded.

Determining whether a person’s estate is a qualifying estate for the new Residential Nil Rate Band and, if so, the amount of Residential Nil Rate Band their estate may qualify for may not be straight forward.   If you wish to know more about the new Residential Nil Rate Band and whether your estate could qualify for this please contact our private client team.