Residence Nil Rate Band – an additional tax free relief against Inheritance Tax

29 May 2018

On 6 April 2017, the Government introduced an enhancement to the Inheritance Tax nil rate band (of £325,000) for residential properties. For the 2018/19 tax year, this enhancement is £125,000, due to increase to £150,000 in 2019/20, and £175,000 in 2020/21.

As with the standard nil rate band, any amount which is unused can be transferred to a surviving spouse. Therefore in the current tax year, the relief could save the estate of a married couple up to £100,000 of Inheritance Tax.

An individual’s death estate is eligible for the additional nil rate band amount if it includes a residential property which is bequeathed to children, descendants (including step-children) and/or their spouses. The relief can also apply if the property is transferred into a favoured trust for the benefit of a descendant. 

The residential property will only qualify for the relief it was lived in by the individual at some point. However, it is worth noting that it need not have been your main residence and if more than one property meets the criteria your personal representatives can make an election to determine which property receives the relief. A property outside of the farming business may be the best use of the relief, if residential properties held on the balance sheet of the farming business are already eligible for Business Property Relief.

Withdrawal of relief

Individuals with large estates (a total value of £2 million), will suffer a tapered withdrawal of the relief (reducing by £1 for every £2 that the estate is worth more than £2 million). For the 2018/19 tax year, the relief would be completely lost for estates over £2.5 million. The value of the estate is calculated before other reliefs such as Agricultural Property Relief and Business Property Relief are deducted. Farmers must consider the value of assets held within partnerships, or shares in family companies, which will fall into their estate and count towards the £2 million limit, even if perhaps fully relieved themselves against Inheritance Tax.

Now could be the right time to consider gifting assets to bring your estate below £2 million and preserve your additional nil rate band amount. As ever, personal circumstances, needs, and family situation have to be considered. The Capital Gains Tax position of any proposed gift is also important.

This is only a brief summary of a complicated area. Ellacotts would be happy to review your Will and potential Inheritance Tax position and consider whether you should be making lifetime gifts or taking other steps to optimise your position. Please contact Laura Morse for more advice on this matter.