How will the new Residence Nil Rate Band affect you?

Lisa Myhill

Written by Lisa Myhill, Solicitor at Spire Solicitors LLP Aylsham office.

The Residence Nil Rate Band came into effect on 6th April 2017. This is a new Inheritance Tax free allowance that may be available to set against a residence within your estate when you die. The Residence Nil Rate Band will be an addition to the current Inheritance Tax free allowance available for individuals of £325,000 (known as the Nil Rate Band). Inheritance Tax is generally charged at 40% on the value or your estate above these tax free allowances.

The value of the Residence Nil Rate Band in the 2017/18 tax year will be £100,000. This means that up to £100,000 of the value of a property in your estate may pass without Inheritance Tax being charged upon it. The allowance will rise by £25,000 each year until the 2020/21 tax year when it will reach £175,000. Thereafter it will rise in line with the Consumer Prices Index.

In order for the Residence Nil Rate Band to be available on your death, the legislation states that your estate must include a ‘qualifying residential interest’ which becomes ‘closely inherited’ when you die. A ‘qualifying residential interest’ is described as a dwelling-house which was your residence at some point during your ownership of it. It does not have to be your current or main residence. ‘Closely inherited’ means that on your death, your said residence should pass to a lineal descendant of yours such as a child, grandchild, step-child, adopted child or even the spouse or civil partner of one of those descendants.

It is important to be aware that a residence will not be deemed ‘closely inherited’ if it is left to a cohabitee. It should also be noted that your Residence Nil Rate Band can only be set against one residence. It may be partially lost if the equity in your property is below the value of the Residence Nil Rate Band allowance due to the market value or a mortgage or other charge upon it.

It is useful however to know that if you do not use any or all of your Residence Nil Rate Band when you die then it can be transferred to your spouse or civil partner. This means that on their death, your spouse or civil partner can use your Residence Nil Rate Band as well as their own to set against a property within their estate. It is also useful to know that there are also provisions in the legislation to protect your Residence Nil Rate Band if you downsize your property or dispose of your main residence completely.

The legislation surrounding the Residence Nil Rate Band is new and may prove to be complicated in practice. You may wish to seek advice from your solicitor on the matter.

This is not legal advice; it is intended to provide information of general interest about current legal issues.