How will the Residential Nil Rate Band (IHT) work? 5 key points

Contemporary house with pool

The new rules come into force in April 2017.

The current nil rate band for Inheritance Tax is £325,000. Which can be transferred between spouses, so basically £650k for a couple.

The maximum amount of RNRB per person will be phased in so that it is:

  • £100,000 for 2017 to 2018
  • £125,000 for 2018 to 2019
  • £150,000 for 2019 to 2020
  • £175,000 for 2020 to 2021

It will then increase in line with CPI for subsequent years.

Key points to note:

  1. It is transferable between spouses – A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
  2. The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
  3. If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.
  4. You need to be a linear descendant to benefit – A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
  5. Downsizing is catered for – legislation in Finance Bill 2016 will provide that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band. The technical details of how the additional nil-rate band will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.