The Residence Nil Rate Band finally reached its full size on 6th April 2020, 5 years after it was trailed as a 2015 election giveaway. As it reaches maturity, we thought we would take another look at this potentially valuable relief.
What Is It?
In 2015, David Cameron promised that couples would be able to leave £1million to their family without an Inheritance Tax (IHT) charge. This is the mechanism used to achieve that magic number (without actually being available to everyone and costing too much).
It is a tax relief available when passing on a main residence to a direct descendent. From the 6th April, it will protect up to £175,000 of the value of a home from IHT – having gradually increased from £100,000 in 2017.
It is in addition to standard Nil Rate Band (£325,000), up to which no IHT is charged. Combining the two allows an individual to pass £500,000 and a couple the promised £1million (assuming a home worth at least £350,000) free of IHT.
Like the standard band, it is transferrable between spouses. Assets can be left from one spouse to another on first death, without losing them (although see below regarding estates of certain sizes).
A Residence Nil Rate Band transfer can even be claimed where the first death occurred before its introduction in April 2017. In fact, as we found out whilst researching for one client, it can even be claimed where the first spouse never owned a property – as long as the spouse to whom it was transferred did on their death!
It is not all generosity however; the band is withdrawn at a rate of £1 for every £2 that an estate’s assets exceed £2million. That is before any other reliefs and exemptions – such as Business Property Relief – are applied.
If a couple left everything to each other on first death, the (two) Residence Nil Rate Bands would be lost completely on second death, if the estate exceeded £2.7million.
This could make a distribution on first death (using the standard nil rate band) attractive, in order to keep the estate value on second death down.
Importantly, it is only the estate’s value at death that is considered – gifts made within the previous 7 years are not added back in. This could provide a significant tax advantage for some in making lifetime gifts. As well as saving 40% IHT on any amount gifted (after surviving 7 years), there could be a further (20%) tax saving by preserving Residence Nil Rate Band.
As with all effective planning, the end goal should always be kept in mind. Tax savings should not be an aim themselves; focus should be on achieving legacy objectives, within the context of wider personal financial planning goals and circumstances.
However, if compatible with legacy requirements, it could be worth structuring plans so as to take advantage of the Residence Nil Rate Band. Planning may include reviewing your wills to ensure they allow for the passing of a family home to a direct descendent in the correct way. If your estate is of a certain size, it could also include making lifetime gifts, or considering a distribution on first death.
As ever with complex areas of planning such as this, we recommend speaking to a professional Leeds financial advisor.