Main Residence Nil Rate Band
The impact of Inheritance Tax has been reduced recently for families that own their own home. HMRC has introduced a new relief, the Inheritance Tax main residence nil-rate band (RNRB), which came into effect on 6 April 2017.
The RNRB is a transferable allowance, that is available to the estates of both parties in a marriage or civil partnership, when their main residence is passed down to a direct descendent: for example, their children or grandchildren. The RNRB is available in addition to the existing £325,000 Inheritance Tax nil-rate band (NRB) threshold.
The RNRB is being introduced in stages:
- Initially, £100,000 in 2017-18
- £125,000 in 2018-19
- £150,000 in 2019-20, and
- £175,000 in 2020-21.
Any unused portion of the RNRB can be transferred to a surviving spouse or partner in a similar way to the existing NRB. The combined benefit of these two reliefs, means that by 2020-21, parents will be able to pass on their private residence - to a value of up to £1 million - free of Inheritance Tax to their direct descendants.
From 2021/22 onwards the RNRB is due to increase annually in line with the Consumer Prices Index (CPI). However, there will be a tapered withdrawal of the RNRB for estates with a net value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold.
Technical notes: to qualify for the RNRB:
- The deceased’s estate must include a residential property or qualify under the downsizing rules.
- The RNRB is transferable where the second spouse or civil partner dies after 5 April 2017, irrespective of when the first partner died.
- If there is more than one residential property, the personal representatives of the deceased person can nominate the property to qualify for the relief.
- The property must have been a residence of the deceased. A buy-to-let property would not qualify for the relief.
- The property must be left to a direct descendant (including a step-child, adopted child or foster child) or other lineal descendant of the deceased.
Readers who have not reviewed their estate planning since this new relief was announced, should consider their options. Estate planning, to mitigate the effects of Inheritance Tax, is a moveable feast. To stay ahead of the planning curve, it will benefit couples with a significant investment in their home to reconsider their Wills and any new opportunities to reduce a possible 40% estate tax. We can help. Please call if you would like more information.