What is the Residence Nil Rate Band?

07 Apr 2020

On 6 April 2020, the inheritance tax residence nil rate band rose to £175,000. This saw the Tories finally fulfil their promise from many years – that couples would be able to leave £1m tax free.

But what is the residence nil rate band and is it as simple as couples can leave £1m tax free? The answer is no, it is not that simple!

What is the residence nil rate band?

Individuals have an inheritance tax allowance of £325,000 per person and to the extent it is not used on death, the unused percentage can be transferred to the surviving spouse and used against their estate when they die. So, if you leave everything to your husband then, when they die, based on current figures, they would have an inheritance tax allowance of £650,000.

The residence nil rate band can also be transferred between spouses and if you died before the residence nil rate band came into effect then you are deemed to not have used your allowance and it is there to be transferred to the surviving spouse.

However, the allowance comes with caveats. The allowance is only available if you leave your home to your direct descendants – the definition of direct descendants is quite wide, for example:

  • It includes stepchildren but it does not include your partner’s children if you and your partner were unmarried.
  • It does not include godchildren nor nieces and nephews so, for many people, there is no one who would qualify as a direct descendant and so, the allowance cannot be used.
  • If you leave your home to your grandchildren but say they cannot inherit until they are 25 and they are only 5 when you die, this is treated as if you have left your home into trust and so the allowance is lost.

In addition, the allowance starts to taper off if your estate is worth more than £2m and is completely lost if your estate exceeds £2.7m. For many people, especially those in London, the allowance will therefore be lost.

 

What can be done to help protect the residence nil rate band allowance?

Options to consider include spouses not leaving everything to each other so that, the estate of the surviving spouse is more likely to be under £2m, giving grandchildren a right to income from the property at a young age even if they do not get the capital until they are 25. Although this is still a trust, if the grandchild has a right to income immediately then it is deemed as if the property has been left to direct descendants.

Following someone’s death, in certain circumstances the Will can be varied within two years of death so it may be possible to do this to allow the residence nil rate band to be claimed.

There are many options and our specialist lawyers here at Trethowans can advise you on the best route for you.

Whilst the lockdown is meaning we cannot meet with you face to face, this does not stop us advising you over another medium such as a videocall.

For more advice please contact our Wills and Trusts team on 0800 2800 421 or contact us here

Author

Mihiri Gajraj

Partner