Inheritance tax and the residence nil rate band

Your estate is the sum total of the value of your assets, including property, cars, jewelry, etc. The normal situation is that, when someone dies, if their estate is worth more than £325,000 and is not being passed to a charity or to their husband/wife/civil partner, the estate will be liable for inheritance tax. Every pound over the £325,000 allowance will attract tax at a rate of 40%.

This is known as the standard nil rate band. Civil partners and married couples can combine these individual allowances. This means that when both people have died, the estate of the second person to die can pass on assets worth up to £650,000 before any inheritance tax needs to be paid.

The residence nil rate band

However, it’s been all change since April 2017, when the residence nil rate band was introduced. This gives an additional nil-rate band when a residential property is passed by inheritance to a direct descendant. This starts at £100,000 and will rise £25,000 each year until April 2020:

£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021

Therefore, from 2020, civil partners and married couples will receive a combined residence nil rate band allowance of up to £350,000. This is in addition to the combined standard nil rate band of £650,000.

The rate for the residence nil rate band for the first person to die, will be determined by the rate when the second person in a married couple/civil partnership dies. The rate becomes the same for both people.

A couple’s combined estate can therefore benefit from a nil rate allowance of up to £1 million.

Nil rate band inheritance tax – an example

To check that you are following this, here is an example.

George and Lesley have been married for thirty years and have one child, Sam. George dies in 2018 and their house, which is worth £810,000, passes in sole ownership to Lesley - no inheritance tax is due because she is his wife. Lesley passes away in March 2021, leaving everything to Sam. The house is now worth £1,100,000. Assuming this is the only asset in the estate, how much inheritance tax is due?

George’s standard nil rate allowance:£325,000
Lesley’s standard nil rate allowance:£325,000
George’s residence nil rate band:£175,000
Lesley’s residence nil rate band:£175,000
Total:£1,000,000
  
Estate value:£1,100,000
Amount liable for Inheritance tax:£100,000
Amount of tax due (40%):£40,000

 

Lee Young, Head of our Wills & Tax Team, says “There are inevitably restrictions on the residence nil rate band allowance. As the name suggests, you have to have owned a property that is eligible when you die (or hold the sale proceeds in your estate from such a property) and enough of your estate has to pass to your children or grandchildren. Where an estate is worth over £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds £2 million. It can be complicated and it is highly advisable to take legal advice when writing your will or when dealing with probate after someone has died.”

Our Wills & Tax Team, based in Christchurch, also covers Bournemouth, Poole and the New Forest. For a free initial chat, please call 01202 499255 and Lee or a member of the team will be happy to discuss any questions that you may have.