The residence nil rate band – not so simple

23rd January 2017

From April, the residence nil rate band comes into being.

It was nearly two years ago that the Conservatives’ manifesto for the 2015 election promised to “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million.” The legislation which starts the first stage of this process comes into effect on 6 April 2017. It will not be quite as simple as the manifesto sounded:

  • Initially the £1 million – actually £500,000 per spouse/civil partner – will be £850,000 consisting of the existing nil rate band of £325,000 plus the new residence nil rate band (RNRB) of £100,000 for each spouse/partner.
  • The RNRB will then increase by £25,000 in each of the following three tax years, so that it reaches £175,000 by 2020/21. During that time, the nil rate band will remain frozen (it is not due to increase until at least April 2021).
  • The RNRB is subject to a tapering reduction of £1 for each £2 by which your estate exceeds £2 million, so large estates will often see no benefit.
  • The RNRB only applies to gifts of residential property made on death (not during lifetime) to the deceased’s direct descendants. It is therefore of no use if you do not have any children/grandchildren or you wish to leave your home to someone who is not a direct descendant.
  • There are rules to cover downsizing or moving into residential care, but these are highly complex.

With the introduction of the RNRB imminent, it makes sense to review your estate planning now to see what impact, if any, it may have. For example, it may require you to revise your will or consider lifetime gifts to limit the impact of tapering. As the tax year end is approaching, why not add estate planning to your year-end review list?

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

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