The introduction of the residence nil rate band could mean that combined with the existing nil rate band a married couple could dispose of up to £1m of their estate free of inheritance tax.
Generally the situation is that on death the estate is charged:
• 0% inheritance tax on the first £325,000. This is known as the nil rate band; and
• 40% on the balance.
Note that the amount of the estate that is charged at 0% depends upon the value of what are known as ‘chargeable transfers’ made by the deceased in the seven years prior to death.
Using spouse’s unused nil rate band
Where a person dies, having survived a spouse or civil partner and the spouse or civil partner who died first had unused nil rate band on his death, then the unused proportion of his nil rate band may be claimed by the estate of the spouse or civil partner who died second on her death.
The residence nil rate band
The residence nil rate band is a welcome addition to the law as it will reduce the inheritance tax burden on many family who wish to pass on their family home to their children and/or their spouse or civil partner.
Although the nil rate band will remain £325,000 until April 2021 legislative changes provide for an additional residence nil rate band where a person dies on or after 6 April 2017.
This will be £100,000 initially, rising by £25,000 each year to £175,000 by April 2021.
The estate of a surviving spouse can claim any proportion of the additional nil rate band unused on the death of the first spouse just like it can claim the unused nil rate band.
Promised figure of £1 million per married couple
Therefore the government reaches its target figure of £1m per married couple as follows:
• £325,000 nil rate band for first spouse; add
• £325,000 nil rate band for second spouse; add
• £175,000 residence nil rate band for first spouse; add
• £175,000 residence nil rate band for second spouse equals
• £1,000,000 per married couple.
For estates valued at £2 million or more, there will be a tapered reduction of the additional nil rate band of £1 for every £2 over the £2 million threshold.
Therefore if your estate is worth £2 million or more the benefit of the residence nil rate band is tapered to the extent that you may not benefit from it at all; but on the bright side you are no worse off than the old position.
Only useful for children and/or their spouse
Further the additional nil rate band will apply only in relation to the value of the deceased’s residence where it passes on death to their children and/or to their spouse.
Therefore the residence nil rate band would be of no use to an aunt who wished to leave property to a niece.