The Proposed Residence Nil Rate Band

It has been announced by the Chancellor that the existing nil rate band of £325,000 is to be frozen until 2021 and that a new “top up” nil rate band of £175,000, applicable to residential property, is to be gradually introduced. This could potentially create a new total nil rate band in 2020 of £500,000 per person, or £1 million for couples if certain criteria are met.

The new nil rate band is to be introduced as follows:

Tax year ending Existing nil rate band Residence nil rate band Total nil rate band (per person)
5 April 2018 £325,000 £100,000 £425,000
5 April 2019 £325,000 £125,000 £450,000
5 April 2020 £325,000 £150,000 £475,000
5 April 2021 £325,000 £175,000 £500,000

The existing nil rate band

Inheritance tax is currently payable at 40% to the extent that a deceased person’s estate (i.e. their assets of any kind that they owned less their liabilities) plus the value of any lifetime gifts made within 7 years of their death exceed the nil rate band allowance of £325,000.

For married couples or civil partners, on the death of the first person where a nil rate band has not been used up in full by lifetime gifts or gifts that are chargeable at death, the balance of the unused nil rate band can be transferred to the survivor for them to set against their estate when they die. On the second death the nil rate band is therefore potentially increased to £650,000.

The “top up” residence nil rate band

In addition to the existing nil rate band, the residence nil rate band will be available:

  1. on death;
  2. where the deceased leaves their interest in a property that was their “residence”; and
  3. to one or more “direct descendants”;
  4. regardless of whether they are married or in a civil partnership.

The residence nil rate band can only be offset against the value (net of liabilities such as mortgages) of a residential property, not other assets.

The definitions:

  • A “residence” means a property where the deceased was resident at some point of their life. It is likely to follow the meaning used for capital gains tax purposes and perhaps an election of a person’s main residence for inheritance tax purposes will now be available too. Where the deceased owned multiple residential properties, the personal representatives will have to nominate which residential property should qualify.
  • A “direct descendant” means a child, stepchild, adopted child, fostered child and their lineal descendants, but no other family members. It is not clear if property left in trust (particularly a discretionary trust) for descendants will qualify.  The residence nil rate band will be transferable to a surviving spouse or civil partner to the extent that it is unused in the same way that the existing nil rate band allowance is transferable. It is unclear whether the residence nil rate band will be transferable if the first death was before 2017/18. For married couples or civil partners the tax saving on the new residence nil rate band allowance is a maximum of 40% of £350,000, i.e. £140,000.

Where a deceased person’s net estate exceeds £2 million, the residence nil rate band will be reduced by £1 for every £2 that a deceased person’s net estate exceeds £2 million. Therefore net estates exceeding £2.35 million will not benefit. The £2 million threshold will rise in line with CPI from 2021/22 onwards.

For property owners who downsize or cease to own their own residence, the residence nil rate band should be calculated by reference to the value of the property sold, provided the deceased left the smaller replacement residence or assets of equivalent value to direct descendants.