UK: Residence Nil-Rate Band Against Inheritance Tax – Will Your Estate Qualify?

Last Updated: 15 July 2019
Article by Kieran McIvor

Potentially, a couple could have a combined inheritance tax nil rate band of £1m from 6th April 2020.

Significant reforms to the Inheritance Tax ("IHT") regime were introduced on 6 April 2017. These reforms included the "Residence Nil-Rate Band", which became effective on 6 April 2017.

In essence, the Residence Nil-Rate Band, where available, will serve as a top-up to the ordinary Nil-Rate Band to which an individual's estate looks to for Inheritance Tax relief following his or her death. 

What could the Residence Nil-Rate Band changes mean to me? The potential to save £140,000 in IHT

The potential value of the relief continues to rise in line with annual increments which began on 6 April 2017.

The maximum possible enhancement is, at the time of writing, limited to £150,000 per individual (thus up to £300,000 per couple).  

The maximum possible enhancement will rise to £175,000 per individual (thus up to £350,000 per couple) for deaths occurring after 6 April 2020. 

With the current maximum combined "ordinary" Nil-Rate Band of £650,000 available on the death of the second of a couple remaining in situ until at least 2021, some couples have the potential for a combined Inheritance Tax Nil-Rate Band of £1,000,000 from 6 April 2020 onwards.  

For those who so qualify, the addition of £350,000 of Residence Nil-Rate Band will confer a saving of up to £140,000 in Inheritance Tax.

Why should I get advice from an expert about Residence Nil-Rate Band?

The Residence Nil-Rate Band is a complex regime and specialist professional advice should be sought if you want to understand if the regime may benefit your estate (and to what extent) or, if it would not benefit your estate as matters stand, how you can try to ensure it will.

What you need to know for the Residence Nil-Rate Band

The following observations are intended to give a flavour of some of the considerations relevant in considering the potential availability and quantum of the Residence Nil-Rate Band on a given estate:

1. Qualifying property

Much of the press coverage has erroneously claimed that the Residence Nil-Rate Band is only available where an individual's home passes to his or her children via a Will or via the Intestacy Rules (which dictate what happens if an individual fails to leave a valid Will). 

For the purposes of the regime "residence" should not be read only as meaning the deceased's home at the date of his or her death. The regime allows claims to be made which involve property which has, at some time, been the deceased's residence.

There is scope therefore for an interest in a second home, perhaps overseas, to qualify the estate for additional relief. 

This could be an important consideration where the survivor of a couple may wish to leave his or her interest in the main residence to someone other than a lineal descendant or the spouse/widow/widower; see below for the full list of eligible beneficiaries.

2. Qualifying beneficiaries

The Residence Nil-Rate Band is available in instances where a residence or an interest in a residence passes to someone who is "closely related". 

The definition of "closely related" is very broad and includes:

2.1. Lineal descendants (children and grandchild, for example);

2.2. Step-children;

2.3. Foster children;

2.4. Natural children adopted by someone else; and

2.5. Spouses/widows/ widowers of any of the above.

It is also important to note that the qualifying beneficiary need not necessarily receive the interest directly in order for the Residence Nil-Rate Band to be available.  In the right circumstances, the Residence Nil-Rate Band can be claimed after a qualifying interest has passed to a qualifying beneficiary via a Discretionary Will Trust via "reading back".

3. The value of the residence owned by the deceased is relevant in determining the value of Residence Nil-Rate Band available

The Residence Nil-Rate Band does not confer a flat-rate enhancement. 

The Residence Nil-Rate Band is a "maxima" allowance, which means that the value of the enhancement cannot (unless the "downsizing" provisions explored later apply) exceed the value of the deceased's interest in the residence in question. 

If the deceased owned a flat with a value of, say, £200,000, if the "downsizing" provisions do not apply, the maximum the estate can claim in Residence Nil-Rate Band is £200,000 (even if, with a more valuable property, £350,000 of relief would be available).

Regard should also be had as to whether there is any outstanding mortgage on the property because that will reduce the amount of Residence Nil-Rate Band available.  If the flat worth £200,000 was subject to a mortgage of £35,000, the available Residence Nil-Rate Band would be restricted to £165,000, for example.

4. An estate does not even have to own an interest in a residence for the relief to be claimed, if the "downsizing" provisions apply

The Residence Nil-Rate Band can, in limited circumstances, be claimed on inheritance passing to qualifying beneficiaries where an individual's otherwise qualifying residence was disposed of (to fund residential care, for example) after 8 July 2015.

5. The Residence Nil-Rate Band is transferable between spouses' estates, even if the first of the couple died long before the regime was introduced

Whilst the regime came in to force on 6 April 2017 and applies to deaths thereafter, in the right circumstances, the Executors of the second party to die can claim two reliefs (up to a combined value of £350,000 from 6 April 2020).  

6.  Even where all the initial qualifying criteria are satisfied, the Residence Nil-Rate Band can be scaled back or denied if the value of the estate is beyond a certain threshold

The Residence Nil-Rate Band is scaled back on any estate with a gross value of more than £2m (£1 of relief being withdrawn for every £2 of value over £2m). 

The gross value for consideration takes account of all value in an estate, even fully relievable value. If a couple have an estate worth £3m (made up almost entirely of assets qualifying for 100% Agricultural Property Relief and Business Property Relief) there will be no Residence Nil-Rate Band available, for example.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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