The Inheritance Act 1984 provides for a nil-rate band of £325,000. After taking into account reliefs and exemptions, any assets over and above the nil-rate band will be charged to Inheritance Tax at the rate of 40%.
Since 9th October 2007, the spouse or civil partner exemption can be used. This means that the unused proportion of the nil-rate band by the first to die can be transferred to the surviving spouse. As such, the nil-rate band can be up to £650,000.
In July 2015 it was announced that a Residence Nil Rate Band (RNRB) would be introduced. This will apply to deaths from 6th April 2017.
These new measures will allow an additional rate of £100,000 to be available to individuals which can be applied to reduce the tax paid on the family home.
In order to utilise the RNRB, certain conditions will apply:
- The RNRB can be claimed when you die after 6 April 2017.
- Your estate must be valued at less than the upper limit. This is initially set at £2 million but is set to rise with inflation from 6 April 2021.
- You must leave your estate to “qualifying beneficiaries.” These are children and grandchildren but it will also include step-children and foster children. The definition also extends to spouses and civil partners of children and grandchildren. Some trusts for these beneficiaries also qualify.
If your spouse or civil partner died before 6 April 2017 the RNRB is not necessarily wasted and can be carried forward meaning that once the change in law becomes effective, some people could see an extra £200,000 added to their nil rate band meaning £850,000 of assets can pass tax-free. The RNRB is set to increase to £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2019-20. As such from April 2019, a couple may be able to pass £1million of assets without the estate becoming liable for inheritance tax. As such, it is important to review your Will to take full advantage of these potential tax saving measures. Additionally, even if your estate is worth more than £2million you should still review your will and estate planning to see whether it is possible to arrange your affairs so the that RNRB can be claimed.
Contact our specialist Inheritance Tax team if you need assistance with the Residence Nil Rate Band.