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Main residence nil rate band for inheritance tax explained

Main residence nil rate band for inheritance tax explained

September 20, 2016 2:56 pm Published by

The main residence nil rate band was introduced as a new element of inheritance tax rules by the Conservative Government in the Summer Finance Bill 2015 and will come into force on April 6 2017.

The measure was taken by the then Chancellor George Osborne as a response to calls from both sides of the House of Commons to make changes to IHT.

On the one hand, some MPs felt the tax unfair, adopting the argument that an estate has already been taxed once through income tax. Others, on the left of the House, felt inheritance tax was a deserved tax on the wealthy.

In the end, Mr Osborne decided to introduce the new main residence nil rate band, with the aim of reducing the burden of IHT – which stands at 40% – by making it easier to pass on the family home to direct descendants without a tax charge.

Who benefits from the main residence nil rate band?

The new band will apply if the deceased’s property, which has been his or her residence, is included in the estate and is left to one or more direct descendants on death.

Here are the rates which will apply over the next few years:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

It will then increase in line with the Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band can be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available if a person downsizes or ceases to own a home and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Despite the changes, it remains the case that inheritance tax affects many families, and is not just a tax on the very wealthy, so it is important to take steps to reduce IHT. Please get in touch with the team at Hartsfield to talk about estate planning.

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This post was written by Paul Verwoert

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