The New Residence Nil-Rate Band – Too Good to be True?

In the summer of 2015, George Osborne announced a new inheritance tax allowance relating specifically to property. The “Residence Nil Rate Band’s” aim is to reduce the potential inheritance tax liability when a property passes under someone’s Will.

The allowance comes into force in April 2017 and starts at £100,000 per person, increasing by £25,000 annually to £175,000 in 2020/21. Once fully implemented it is possible for a couple to pass  £1m of value free of inheritance tax. There are however a number of criteria which have to be met to benefit from the new allowance.

Property passing under an individual’s Will has to be ‘closely inherited’ which means being inherited by direct descendants. An estate can benefit where property is left to children or grandchildren but not where the property is left to brothers or sisters of the deceased.

The property has to have been the deceased’s residence at some point. This means that a ‘buy to let’ property will not qualify. However, a property occupied by the deceased and subsequently let to tenants would qualify.

There is an upper limit on the value of an Estate which can benefit from the allowance. Where the value is more than £2m the allowance is reduced by £1 by every £2 that the estate exceeds the £2m taper threshold.

The value of the Estate on which the £2m is based is the total value of all the assets of the deceased less mortgages and other loans. For farmers and other business owners this means that the full value of land and other business assets are included in the calculation of the £2m. Other inheritance tax reliefs, such as Agricultural Property and Business Property Relief do not reduce the value of the estate.

When valuing an estate to calculate a claim to the Residence Nil Rate Band, it is important to remember that gifts made in the seven years prior to death are not included. Although ‘Death Bed’ planning should be avoided where at all possible it may be relevant to reduce the value of an estate to secure the new allowance; for example, the gifting of business assets which attract Business Property Relief but which would result in an estate worth more than £2m on death. There may be other taxes such as capital gains tax to consider but the principle still applies.

With more people owning properties outside the UK it should be noted that the new allowance is available to UK domiciled persons on overseas properties. This is because UK domiciled persons are chargeable to inheritance tax on their worldwide assets. Conversely, non UK domiciles can only claim the relief on UK based property as they are not charged to inheritance tax on assets held outside the UK.

Not all of the rules relating to the new Residence Nil Rate band can be covered in an article like this. If you have made a Will or are considering reviewing an existing Will professional advice should be taken to make the best use of the tax allowances available.

If you would like more information on anything covered in this article – or you have any general questions regarding your personal taxation situation, please contact us on 0845 880 5678 or email action@wrightvigar.co.uk the Tax Team at Wright Vigar would be delighted to be able to help you.