The law changes regularly and so to do the tax thresholds. It is important that you understand that as this document was valid as at 06 April 2017 and update in tax year 2019/20.
The “Standard” Nil Rate Band v The Residence Nil Rate Band
The Nil Rate Band is something additional to the Residence Nil Rate Band and you can read more about the “standard” Nil Rate Band in our article “Wills & Probate | The Nil Rate Band and the 7 Year Rule”.
We recommend that you read that article first then this one relating to the Residence Nil Rate Band for ease.
The “Standard” Nil Rate Band
When you pass away, you can pass on your assets free of Inheritance Tax (IHT) up to a certain value. That value is known as your Nil Rate Band. The Nil Rate Band is currently £325,000 and has been fixed at this amount for the last 10 years. It will increase in line with inflation from April 2021.
In simple terms, and nothing is really simple when it comes to tax, that means that you can pass up to £325,000 worth of assets to your loved ones (2019/20 tax year) without having to pay IHT.
You might have a Nil Rate Band lower than £325,000 (tax year 2019/20) on your death if you make gifts during your lifetime that are not covered by your tax-free gift allowances and you die within seven years of making those gifts. The value of those gifts will reduce pound for pound your Nil Rate Band, meaning less (or none) of your estate will be passed on tax-free to your intended recipients (known as beneficiaries).
Residence Nil Rate Band
The Residence Nil Rate band increases that “standard” Nil Rate Band available to you when you pass away if you meet certain criteria and that can save you paying IHT or reduce the amount that you may have to pay.
The aim of the Residence Nil Rate Band is to relieve the burden of inheritance tax (IHT) by making it easier for you to pass on your family home without incurring inheritance tax.
Who Can Benefit From The Residence Nil Rate Band?
The Residence Nil Rate Band applies to individuals with direct descendants who have an estate (including the main residence) that exceeds the “standard” Nil Rate Band of £325,000 (for tax year 2019/20).
How does it work?
If you are giving away your home to your children or grandchildren (including adopted, foster and step-children) when you pass away then you may qualify for the Residence Nil Rate Band, meaning you will gain an additional threshold before IHT becomes payable on your estate.
The additional threshold will change every year for the next few years as follows:
£125,000 in 2018/19
£150,000 in 2019/20
£175,000 in 2020/21
It will then increase in line with the Consumer Price Index (CPI) from 2021/22 onwards.
Therefore, the amount added on to the “standard” Nil Rate Band for instance in 2019/20 is £125,000 in addition to the “standard” Nil Rate Band of £325,000 making a total of £475,000 (That is, £325,000 + £150,000 = £475,000) BUT it will only apply up to the value of your property that you leave to your direct descendants.
That property must be a qualifying residential interest or QRI.
What is QRI?
A QRI is a dwelling house that has been your residence at some point. A dwelling house can include a variety of different less conventional types of homes if they been used as your residence. It does not need to be your main residence and could be one that has only been used briefly.
What is the Transferable Residence Nil Rate Band?
Married couples and civil partners can transfer any unused Residence Nil Rate Band in the same way as they can transfer the “standard” Nil Rate Band which can give you a Nil Rate Band of up to £1,000,000 (one million).
A claim has to be made within two years of the second death.
The home does not need to have been the same one that your spouse or civil partner lived in with the deceased spouse: it can be any home provided they lived in it at some stage and it is in their estate when they die.
If the first spouse died before 6 April 2017 different rules apply and you should contact us to determine what transferable Residence Nil Rate Band rate is available.
Reviewing Your Will
It always makes sense to keep your Will regularly under review to provide for your changing circumstances. By doing so you may also be able to get good advice from a qualified Solicitor on any changes in the law that you can benefit from and assist you to make changes to your Will where the law has changed that may adversely affect the intended outcomes in your Will.
By not reviewing your Will to take advantage of the Residence Nil Rate Band for example, may mean that you are paying IHT on an extra £150,000 (as at 2019/20 tax year), meaning that you pay IHT at 40% on that sum which currently amounts to £60,000 – and it could be much more.
Is it time to review your Will?
The information provided in this article is not intended to constitute legal advice and you should take full and comprehensive legal advice on your individual circumstances by a fully qualified Solicitor before you embark on any course of action.