Each individual’s estate and taxable lifetime gifts are exempt from inheritance tax up to a threshold which is known as the Nil Rate Band. This currently stands at £325,000.
The 6th April 2017 saw the introduction of the Residence Nil Rate band which will be available on death, in addition to the current Nil Rate Band.
As the name suggests, the Residence Nil Rate Band is only applicable to property rather than to the estate as a whole and certain conditions require to be met in order for the relief to be claimed.
The estate will be entitled to the Residence Nil Rate Band if:
- The individual died on or after 6th April 2017
- The individual has an interest in a property which has been used as a residence.
- The individual’s direct descendants (such as children or grandchildren) inherit the property, or a share of it, and
- The value of the individual’s estate does not exceed £2 million (In estates which exceed £2 million, the Residence Nil Rate Band will be tapered).
The Residence Nil Rate Band will also be available where an individual has downsized to a less valuable home or sold or gifted their home after 7th July 2015.
The threshold for the Residence Nil Rate Band for 2017/18 is £100,000. This limit is to increase by £25,000 per year until 2020/2021 when the limit will be £175,000. Thereafter, it will increase in line with inflation.
As is the case with the Nil Rate Band, if an individual does not utilise the Residence Nil Rate Band on their death, for example if their estate was passing to their spouse or to charity, which would be exempt from Inheritance Tax, then this can be transferred to their spouse and utilised on their death.
Therefore, in the event that an individual dies in 2021 having been predeceased by their spouse and having inherited all their estate, then provided their own estate meets the relevant conditions, it would be exempt from inheritance tax up to a value of £1 million, being two Nil Rate Bands totalling £650,000 and two Residence Nil Rate Bands totalling £350,000.
The introduction of the Residence Nil Rate Band offers up the opportunity for further inheritance tax savings, however careful estate planning and expert advice is recommended in order to take full advantage of this additional relief.