Will My Estate Benefit from the Residence Nil Rate Band?
17 May 2018
By Probate Solicitor, Kate Rutherford
The residence nil-rate band is available for the Estates of people who died on or after 6 April 2017. It applies so that less Inheritance Tax may be paid when the family home is left to direct descendants of the deceased. This includes children and/or grandchildren along with other direct descendants.
How Does the Residence Nil Rate Band Work?
As of 6 April 2018, the residence nil-rate band is £125,000 for deaths that have occurred on or after this date. The amount of residence nil-rate band will rise by £25,000 per tax year until it reaches £175,000 on 6 April 2020.
Your Estate should benefit from the residence nil-rate band, in addition to the main nil rate band (currently £325,000), if you leave your interest in the family home to direct descendants. For example, your children and/or grandchildren.
The amount of the residence nil-rate band available will depend on the value of your home. For example, if your home is worth £100,000, only £100,000 of the £125,000 residence nil-rate band can be claimed.
The full £125,000 can only be claimed where your home is worth £125,000 or more.
Unused (Transferable) Residence Nil Rate Band
Any unused residence nil-rate band can be transferred between spouses or civil partners. This means that if a spouse died and they didn’t use all of their residence nil-rate band, then the remaining allowance can be claimed on the death of their surviving spouse or civil partner.
This applies even where the first spouse or civil partner died before 6 April 2017. As the spouse or civil partner who died first did not have the opportunity to use the residence nil-rate band, it can be automatically claimed by the Executors in the Estate of the second spouse or civil partner.
Mrs Smith died on 1st May 2018 leaving an Estate worth £1 million. The entire Estate, including her family home worth £400,000, is left to her three children.
Mrs Smith’s husband had died four years before her, leaving his entire estate to Mrs Smith. Mrs Smith’s Executors can therefore claim the following:
- Main nil rate band – Mrs Smith = £325,000
- Residence nil rate band – Mrs Smith = £125,000
- Transferable nil rate band – Mr Smith = £325,000
- Transferable residence nil rate band – Mr Smith = £125,000
This means that a total of £900,000 of Mrs Smith’s estate would not be subject to Inheritance Tax.
The balance of £100,000 would then be taxed at 40%.
What if I Move Out of My Family Home?
If, for example, you move in to a care home and no longer live at the property you own, the residence nil-rate band will still apply provided that the property was your residence at some point since you first owned it.
What if I Sell My Family Home?
If you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary, the residence nil-rate band will still be available where you have sold your home and downsized to a less valuable property, or even if you no longer own a property.
What if I Have More than One Property?
If, at your date of death, you own more than one property that is or has been your residence, your Executors must choose which of them will benefit from the residence nil-rate band.
Estates Worth £2 Million or More
If your Estate is worth £2 million or more, the residence nil-rate band is tapered away by £1 for every £2 that the Estate is worth over the ‘taper threshold’ (£2 million).
Where your Estate is worth more than £2 million, you should review your Will and any other Estate planning. Establish whether it is possible to make arrangements now which mean that the residence nil rate band can be claimed in full after you die.