The Residential Nil Rate Band – too good to be true?

Rianne Wilcockson

Rianne Wilcockson

In 2007 the Conservatives announced proposals to allow households to pass residential property up to a value of £1 million on death to their direct descendants’ tax free. At the time this sounded all too good to be true and it wasn’t until the Summer Budget in 2015 that any clarity was provided.

As a reminder, in the UK, estates with total assets of less than £325,000 that pass on the death of an individual don’t attract Inheritance Tax (IHT). This is known as the nil-rate band. The government’s proposals above provided an extension to that nil-rate band.

In the case of a married couple, their nil-rate band doubles to £650,000 but unmarried couples are only entitled to £325,000 each as the nil-rate band is not transferable. A carefully drafted will is therefore essential in those circumstances to ensure the nil-rate band is used efficiently.

Under these new rules, if an Estate exceeds £325,000 for an individual or £650,000 for a married couple, an exemption from paying tax may be sought if there is a residential property in the estate which exceeds the value of the nil-rate band.

The new additional allowance will have a staggered entry into the tax regime starting from 5 April 2017. The date of death for the individual concerned or the last survivor of the married couple must be after this date to qualify for the relief. The additional allowances extend the nil-rate band by the following amounts as follows:

£100,000 for 2017/18
£125,000 for 2018/19
£150,000 for 2019/20
£175,000 for 2020/21

So for example in 2020, a single person may be entitled to up to £500,000 tax free inheritance allowance provided that certain conditions are met.

The first catch is that the property must be “closely inherited”. This means that you will be covered by the additional allowances only as long as you pass the property on to your children or grandchildren. This also includes step-children and adoptive children. A couple who have no children however will not be able to dispose of their property in a way that will benefit from the new allowances. Some, the writer included, would say that this unfairly punishes those who choose to or cannot have children.

The property must also be a “qualifying residential interest”. This means that the property does not necessarily need to be a main residence to qualify but there must have been some intention to live in it, so a buy-to-let property won’t qualify. A Personal Representative can elect a property that they wish to cover under the new additional nil rate band, therefore most will elect the most expensive property in the portfolio, providing it qualifies.

In addition an important point to note is that those who have sold up the property to live in a care home or have down-sized will still be allowed to utilise the residential nil-rate band allowance, provided that the new property and any additional cash from the proceeds of sale are passed to the immediate descendants as defined above.

The final restriction set before utilising the enhanced nil-rate band, is that in an estate over £2m the amount that the Executors can claim will be reduced by £1 for every £2 above the threshold. This therefore means that a surviving spouse with an estate of more than £2.7m (or £2.35m for a single person) would not qualify for any additional reliefs. It is essential that if this applies to your set circumstances you seek professional advice regarding lifetime gifts and any options that may be open to you.

So whilst the enhanced nil-rate band has been favourably received, an attention to detail is vital to make it work. The Inheritance Tax Regime is as complicated as ever and we would therefore stress that good legal advice is more important than ever in planning your future finances.