The residential nil rate band was introduced in 2017. At the time, it was hailed as the additional inheritance tax allowance needed to combat rising house prices which were tipping average estates into the grips of the inheritance tax regime.
Unfortunately the allowance has never been the easiest thing to navigate. So let’s start with the basics:
- The nil rate band is an additional inheritance tax allowance, in addition to the standard £325,000 nil rate band allowance, worth up to an additional £175,000.
- Any unused allowance can be transferred between spouses, as can the standard nil rate band, so that, where a couple leave their estate to each other in the first instance and then on to their children, the survivor’s estate can have a potential inheritance tax allowance of up to £1,000,000.
- The transferable allowance is available even where the first spouse died before the allowance was introduced.
- In order to qualify, the deceased’s estate must include a qualifying interest in a residential property (or the proceeds of sale such a property) and their estate must be passing to lineal descendants (at least up to the value of the residential allowance). Lineal descendants include children, grandchildren, step-children and adopted children.
So far, so good, however there are a few issues to be aware of:
- The residential nil rate band is reduced where the survivor’s estate exceeds £2,000,000. Where this is the case, the allowance is reduced by £1 for every £2 the estate exceeds £2,000,000.
- The benefits are primarily there for married couples, and not cohabitees. A whole topic in and of itself, however it is worth noting that the spouse exemption does not apply for cohabitees on a first death and the transferable allowances (both standard and residential) are also unavailable on the survivor’s death.
- Childless couples and single people also see no benefit from this added allowance.
- The allowance itself only applies to estates and so cannot be set against gifts made during the person’s lifetime. If a person gifts away their home during their lifetime (also something we do no recommend) then the allowance may also be lost.
- In order to claim the allowance, a full inheritance tax return will often be required. The forms are far from straightforward, especially where the property was sold during the persons life time and so a claim is being made to set this against the proceeds of sale or where executors are making a claim for downsizing relief.
There are also added complications where trusts become involved. In order for the residential allowance to apply the estate must be passing to lineal descendants. One fairly standard type of planning involves the first to die leaving their estate on a life interest trust for their spouse (known as the life tenant) and then, on the spouse’s death, to their children (known as remaindermen). In this scenario, the test is whether or not the remaindermen are lineal descendants of the life tenant. If so, then the life tenant’s executors can claim both the residential and transferable residential nil rate band. However, if the couple were unmarried, then either the transferable allowances are lost or, if the remaindermen are not the children of the life tenant, then the residential allowance is lost altogether.
It is possible to prepare your Will and structure your estate in a way which maximises the inheritance tax allowances available to you. Allan Janes undertake a review of your inheritance tax position whenever we take instructions for Wills, to ensure that this is the case.
If you would like to discuss your Will or other estate planning then please contact a member of our Private Client Team on 01494 521301.