The Residence Nil Rate Band – An Additional Inheritance Tax Relief
The proposals in the Summer Budget 2015 of reducing the burden of Inheritance Tax (IHT) for families and making it easier for the family home to be passed to direct descendants have now been implemented. The new residence nil rate band is available for deaths after 6th April 2017. Partner Chris Hopkins explains the new relief.
What is the residence-nil-rate band?
The residence nil rate band is essentially an additional allowance for IHT introduced to assist those who own their own property. In order to qualify for the relief, individuals must satisfy the criteria set out below. The residence nil rate band has an initial additional allowance of £100,000 per individual. This will increase by £25,000 for the next three years until 2020-2021 when the phasing of the allowance will be complete and each individual w. ill have an additional £175,000 residence nil-rate band available. This rate is then set to increase in subsequent years in line with CPI.
The amount of residence nil rate band available is the lower of the net value interest in a property or the maximum amount of the band available. In other words, if the house is worth less than the residence nil rate band in force at the time it is being claimed, then the amount of allowance available is limited to the value of the property. The excess of the allowance is lost.
As per the standard nil-rate band (currently £325,000 per person), the residence nil rate band is transferable between spouses and civil partners. This means that with careful planning and consideration, upon the death of the second spouse, there is the potential for a family to have relief from IHT up to a value of £1 million (2 x £325,000 plus 2 x £175,000).
Who can benefit from the residence nil rate band?
The application of the new legislation is complex and is very specific in the situations where it can be utilised.
The availability of the relief can only be used when:-
1) a married individual passes a main residence on death to a direct descendant (being a child, step child, adopted child or grandchild); and
2) the beneficiary of the property becomes absolutely entitled to the property on that death.
This specific application has implications if previously a Will had been drafted to create a Discretionary Trust on death, as was common prior to the introduction if the transferable nil rate band in 2007. Property forming the assets of a Discretionary Trust created by a Will would not be passing the propety to a direct descendant thereby meaning the additional allowance of the residence nil rate band would not be available.
Restrictions with the residence nil rate band
The rules restrict the relief to only one residential property per family; however representatives of the estate will have the option to nominate which property the relief is applied to.
In situations where the deceased may have downsized their property to a lower value residence or sold their property during their lifetime, there are some extra provisions which may assist. If the downsizing or sale of the property occurs after 8th July 2015 and the deceased leaves the smaller property or assets of an equivalent value to a direct descendant the additional available relief can still be used to reduce the value of the estate. Keeping copies of the completion statement from the sale of the property will be very important in being able to demonstrate the downsizing.
For larger estates over the value of £2 million the relief available is tapered by £1 for every £2 over the threshold meaning that once the net estate value exceeds £2.35 million (or £2.7 million on the death of a second spouse) the relief will no longer apply to the estate.
The introduction of this new legislation means it is now a necessity to review existing Wills in order to ensure that the maximum amount of the relief can be utilised upon death. Our expert Private Client department has Solicitors based across all our offices and are able to provide the specialist service required for dealing with the incorporation of this new, complex legislation.
Please contact Chris Hopkins, Head of the Private Client department on 0161 764 4062 or email at firstname.lastname@example.org or drop into your local office for further advice and guidance on Wills and Estate planning.