Every individual has a nil rate band of £325,000 after which any assets above this threshold become taxable at 40% unless they are passing to an exempt beneficiary such as a charity or spouse/civil partner.
This threshold has been frozen until the end of the 2020/21 tax year.
The government has, however, now introduced a new ‘residence nil rate band’ for use when a property is left to a qualifying person.
When does the residence nil rate band apply?
The residence nil rate band applies if:
- The individual dies on or after the 6th April 2017;
- The individual owns a home or a share of a home that is included in their estate;
- The individual’s direct descendants inherit the home or a share of it;
- The individual’s estate is worth less than £2,000,000.
How much is the residence nil rate band worth?
The residence nil rate band gives those qualifying individuals an extra tax free allowance. Currently the figures are as follows:
- £100,000 in 2017/18;
- £125,000 in 2018/19;
- £150,000 in 2019/20;
- £175,000 in 2020/21.
What happens if I downsize or sell my property?
The residence nil rate band is still available provided that you downsized or sold your property on or after the 8th July 2015 and your assets of an equivalent value are passed to your direct descendants. These assets are subject to the maximum amount of the residence nil rate band as above.
Who are my ‘direct descendants’?
These can be any of the following people:
- Your child;
- Your grandchild (or any other lineal descendants);
- The spouse or civil partner of your lineal descendant;
- Your step-child (provided that you are married/in a civil partnership with their parent);
- Your adopted child;
- Any child that was fostered by you;
- Any child for whom you are a guardian/special guardian.
Which home will it apply to?
Your personal representatives can only use the residence nil rate band for one of your properties. The property must be included in your estate and you must have lived in it at some stage (i.e. the residence nil rate band will not apply to buy-to-let properties). Your personal representatives can decide which property the residence nil rate band should apply to.
How will they calculate the amount of the residence nil rate band available?
Your property will be valued as per open market value minus any liabilities. Only the share passing to your direct descendants will benefit from the residence nil rate band. If you or your spouse/civil partner pass away having not used the full residence nil rate band then any unused threshold can be transferred to the surviving spouse/civil partner.
How can I ensure that I will benefit from the residence nil rate band?
It is worth reviewing your will to ensure that you are leaving your assets in the most tax efficient way. There are conditions for when the residence nil rate band will apply (for example, if you leave your property to your direct descendants on the condition that they must reach a certain age before they can inherit it then the residence nil rate band will not apply). It is therefore also worth seeking legal advice to ensure that you are able to benefit from this additional tax free threshold.