Residence Nil Rate Band Explained
17 August 2017
When someone dies, the total value of their ‘Estate’ (meaning everything he/she owned) must be valued. If the total value is above a certain threshold, Inheritance Tax must be paid. Presently the threshold for Inheritance Tax is £325,000 for an individual or up to £650,000 if you’re married.
However, as of April 2017, people who own a property (or shares in the property) and are leaving it to their direct descendants are entitled to an additional allowance. This is called the Residence Nil Rate Band and it effectively increases the threshold for Inheritance Tax.
Inheritance Tax Thresholds
If someone died on or after 6 April 2017 and their Estate is above the Inheritance Tax threshold, the Estate may be entitled to an additional threshold. The maximum amount of the additional threshold for 2017 to 2018 is £100,000, or the value of the home if this is less than £100,000.
Therefore the amount you can claim depends on whether your property is worth less than the threshold. For example, if the property is worth £80,000 and the Residence Nil Rate Band is £100,000, only £80,000 can be claimed. But if the property is worth £105,000 and the Residence Nil Rate Band is £100,000, only the maximum of £100,000 can be claimed.
The maximum available amount of the additional threshold is due to increase yearly as follows:
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
In order to use the Residence Nil Rate Band, the person who died must have left their home, or a share of it, to their direct descendants. If the deceased was residing in two properties, the Residence Nil Rate Band can only be claimed for one of them.
For the purposes of the Residence Nil Rate Band, a direct descendant is a:
- Child, grandchild or other lineal descendant of the deceased person
- Spouse or civil partner of a lineal descendant (including the deceased’s widow, widower or surviving civil partner).
- In addition, a person’s direct descendant is a:
- Child who is, or was at any time, the deceased person’s step-child
- Child to which the deceased had been appointed as a guardian or special guardian while the child was under the age of 18
- Child who was fostered at any time by the deceased person, or
- An adopted child of the deceased person
In this context, the child who inherits the home doesn’t have to be under the age of 18. A person’s step-child is limited to someone whose parent is, or was, the spouse or civil partner of that person.
Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the list above.
One or more direct descendants of the deceased can inherit a home, or a share of it.
To be eligible for the additional threshold, the home, or the share of it, must be left to a person’s direct descendants. This means it will become part of a beneficiary’s Estate as a result of the person’s death.
If a home is left to beneficiaries who are a mixture of direct descendants and other relatives or individuals, the value of the home must be apportioned according to the share of the property the direct descendants inherit.
The Estate may still qualify for the Residence Nil Rate Band if the deceased person downsized, sold or gave away their home after 7 July 2015.
Is the Residence Nil Rate Band Transferable?
The Residence Nil Rate Band is transferrable, in a similar way to the current Nil Rate Band.
The Residence Nil Rate Band is available to transfer between couples who are married or in a civil partnership. If it isn’t used when the first spouse dies, it can be transferred to the second spouse’s Estate and used when he/she passes away.
If the first spouse died before April 2017, it won’t have been possible to use their Residence Nil Rate Band (as it hasn’t been introduced then). So presently £100,000 is the amount that will be available on the second death after April 2017.
Residence Nil Rate Band Limitations
There are a number of limitations on when the Residence Nil Rate Band will be available, so care must be taken when applying it.