Jo Clements summarises the new inheritance tax exemption; the ‘Residence Nil Rate Band’
April 2017 will see the introduction of a new inheritance tax exemption which links to someone’s main residence. The ‘residence nil rate band’, as it will be known, will start at £100,000 and will increase by £25,000 for four years so that in 2020/21 estates may be able to claim an exemption of £175,000 to set against the value of a property.
This exemption will be in addition to the current nil rate band of £325,000 and, in the same way as the current nil rate band, can be transferred between spouses or civil partners. This means that by 2020/21 if a widow or widower dies having inherited everything from the first spouse to die they may be able to claim two nil rate bands and two residence nil rate bands. This means that the total exemption available will be £1 million.
The residence nil rate band can only be claimed in certain circumstances. The property will need to be left to ‘lineal descendants’ which, in this case, is defined quite broadly. The definition includes children, grandchildren or step children. It also includes sons and daughters in law and foster children.
Additionally, the residence nil rate band will be tapered if an estate is worth more than £2 million. While this sounds quite high, the value that is used to see whether the estate qualifies for the residence nil rate band is the value before any additional reliefs (such as business property relief) are applied.
Having certain types of trust within a Will may prevent the residence nil rate band being claimed. This is because the property has to be ‘closely inherited’ i.e. pass to someone directly rather than via trustees. It is worth remembering that this will only apply for certain trusts so it makes it particularly important to review the content of your Will so you know where you stand.
It is advisable to review your Will regularly or if circumstances change. The introduction of the residence nil rate band provides such an opportunity. It might be the case that no changes are necessary but it is better to by fully aware of the circumstances than to miss out on being able to claim this new exemption.