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September 28, 2015

Inheritance Tax - Introduction of Main Residence Nil-Rate Band

A Main Residence Nil Rate Band will be introduced from April 2017, thereby effectively raising the Inheritance Tax threshold for homeowners to £850,000 for married couples or civil partners, rising to £1m by April 2020, provided that their home is worth at least £350,000.

Current rules

Under the current rules taxpayers in the UK can leave an estate valued up to the nil-rate band free from Inheritance Tax. The nil-rate band currently stands at £325,000 per person and anything in excess of this amount will be subject to Inheritance Tax at 40%.

For example, the Inheritance Tax liability for a single person leaving behind an estate worth £500,000 would be £70,000 (£500,000 - £325,000 @ 40%).

Married Couples & Civil Partners

Where a taxpayers leaves everything to their husband, wife or civil partner, their estate will be exempt from Inheritance Tax.

Married couples and civil partners can also give any value of gifts to each other during their lifetime without a charge for Inheritance Tax being triggered.

It is also possible for married couples and civil partners can transfer their unused annual allowance to the surviving spouse, thereby enabling them to pass on assets to relations worth up to £650,000.

New Rules: Additional allowance

In addition to the £325,000 nil rate band there will be a new Main Residence Nil Rate Band which will apply to main homes passed down to direct descendants. Direct descendants has been defined as children, stepchildren, adopted and foster children, and grandchildren.

This additional nil-rate band has been introduced to reduce the burden of Inheritance Tax by making it easier to pass on the family home to direct descendants.

By 2020/21, each parent will have a nil-rate band of £325,000 plus an additional allowance of £175,000, provided that their estate includes a property worth at least £175,000.

Like the nil-rate band, the Main Residence Nil Rate Band will be transferrable between spouses on death irrespective of when the first of the couple died. Furthermore, it does not matter who owns the residence and the Main Residence Nil Rate Band will still be capable of being carried forward. A couple will therefore have a joint nil-rate band of £650,000 plus an additional allowance of £350,000.

For estates with a net value of £2m, the MRNRB will be subject to a tapered withdrawal. For every £2 of value over £2, £1 will be deducted from the MRNRB from 2017.

It should be noted that parents who have set up a discretionary trust under a will in order to ensure that assets are left to intended beneficiaries will not be entitled to the Main Residence Nil Rate Band. This is because on death the trustee will take on legal ownership of the property and therefore will not be directly inherited by direct descendants.

In contrast, if the property passes to a will trust after death, provided that the beneficiary takes an interest in possession in that trust then the MRNRB will be available. Other trusts which will qualify for the MRNRB are disabled persons trusts, bereaved minor's trusts and age 18 - 25 trusts.

If an individual owns more than one home they should nominate which home is the main residence. There is no requirement that the property is occupied as a residence throughout the ownership period of the taxpayer. With this in mind, care must be taken to ensure that the Main Residence Nil Rate Band is offset against the property with the highest value.

From 8 July 2015 the Main Residence Nil Rate Band will also apply to estates where homes have been downsized or converted to cash.  Where part or all of the MRNRB might be lost because the deceased downsized to a less valuable residence or had ceased to own a residence, the MRNRB will still be available provided that:

  • The individual died on or after 6 April 2017
  • The property disposed of was owned by the individual and it would have qualified for the MRNRB had the individual retained it
  • A less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased's estate
  • A less valuable property, and any other assets of an equivalent value, are inherited by the individual's direct descendants

Provided that the downsizing or the disposal of the property occurred after 8 July 2015, there is no time limit on the period in which the downsizing or disposals took place.

Contact us today to discuss your tax requirements.
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