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The new residence nil-rate band

The inheritance tax payable on death is normally 40% on the value of a person’s estate in excess of the available nil-rate band, which has been £325,000 since 2009. However, if the deceased had a spouse or civil partner who died before them without using their own nil-rate band, then the unused proportion can be transferred to the deceased (a claim is required). In practice therefore, if the first of a couple to die leaves their whole estate to their spouse, without having made any gifts in the previous seven years, the nil-rate band on the death of the surviving spouse is £650,000.

With the average value of a semi-detached house in London now over £600,000 many ordinary people have found themselves affected by inheritance tax. The 2015 summer budget included provisions to address the Conservative Party’s 2007 election manifesto pledge to increase the nil-rate band to £1m. But the new rules, which don’t come into force until 6 April next year, are far short of a simple increase in the nil-rate band!

The new ‘residential enhancement’ introduces a ‘residential nil-rate band’ (RNRB). But only if a deceased person’s estate includes a home that is inherited by descendants. The additional relief is being phased in over a number of years and is limited to the value of the interest in the home, up to a maximum of £100,000 for a death in 2017/18, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. Any unused RNRB can be transferred between spouses or civil partners.

With the inheritance nil-rate band at £325,000 per spouse, plus the RNRB of £175,000 per spouse, from 2020 a couple can leave their descendants up to £1m free of inheritance tax.

If the value of the deceased’s estate exceeds £2m, these enhancements are reduced by £1 for every £2 the estate exceeds £2m. The actual value of the estate is used for this test, not the value after reliefs which are taken in to account for inheritance tax purposes. Estates which include valuable shares in family companies (which qualify for business property relief), for example, may find the residential enhancement is withdrawn.

The Finance Bill 2016 proposes that the RNRB should apply when the deceased had downsized or ceased to own a home after 7 July 2015. Aspects of these proposals are still under discussion.

Specific advice should be obtained before taking action, or refraining from taking action, on the basis of this information.

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