The New Residence Nil Rate Band

How does the old saying go – “nothing is certain but death and taxes”. Unfortunately the saying still holds true today and as explained in last week’s article – ‘How Much Inheritance Tax Will My Beneficiaries Have to Pay? – the standard rate for inheritance tax for anything above the nil rate band is a staggering 40%!

The Government have recently announced an additional nil rate band which will be phased in from 6 April 2017 – the residence nil rate band. This is a second nil rate band which relates to your main residence (it can only be used in relation to one residential property where you have lived. However, your personal representatives (See ‘Who Will Be The Executor Of My Estate’) can elect which property it should be applied to) and effectively reduces the amount of tax which your estate will have to pay.

The Residence Nil Rate Band – Year On Year

From 6 April 2017, the residence nil rate band will be introduced as follows:

2017 – 2018 – £100,000

2018 – 2019 – £125,000

2019 – 2020 – £150,000

2020 – 2021 – £175,000

2021 onwards? Although a limit has not been confirmed, it is thought that the residence nil rate band will then increase in line with the consumer prices index.

In practice, this will only really affect estates where the taxable estate is over the £325,000 threshold. In these cases, the personal representatives can apply the residence nil rate band to the main residence to either the full amount of your interest in the property, or to the maximum amount of the band. The usual nil rate band would then be applied to the remainder of the estate and then anything in excess would be taxed at 40% (subject to any other exemptions or reliefs).

The residence nil rate band will only be applicable if your main residence is being left to your direct descendants – your children, adopted children, step-children, foster children and any descendants.

Some important points to note
  1. Any unused portion will be transferable where the second spouse dies on or after 6 April 2017 irrespective of when the first spouse died.
  2. If your estate has a net value of over £2 million, the residence nil-rate band will be tapered away. For the period 2017-2018, it will be lost for estates valued over £2.2 million.
  3. It is also available to people who have downsized or ceased to own a home on or after 8 July 2015, where the assets of an equivalent value are passed to direct descendants. This has been proposed as a means to avoid disincentivising people from downsizing.

If you would like to discuss the nil-rate bands and how this would apply to your estate, please give our specialist Wills, Probate & Trusts team in Leeds, Wakefield and Manchester a call on 0113 244 9931.

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