The Main Residence Nil-Rate Band Exemption
If you pass on your family home to your children or grandchildren and your estate you can benefit from the main residence nil rate band exemption, reducing the amount of IHT payable as long as the home is not worth more than 1 million. The exemption is in addition to the general nil rate band exemption from IHT of 325,000 and has been phased in progressively. In the current tax year 2020/21 that is worth an extra £175,000. Let's explain that benefit in a little more detail.
Additional nil rate band.
For deaths that occur on or after 17 April 2017 and additional nil rate band, the main residence nil rate band will be available when a residence is passed on to a direct descendant. The main residence nil rate band is set at:
100,000 for the 2017/18 tax year; 125,000 for 2018/19; 150,000 for 2019/20; and 175,000 for 2020/21.
The main residence nil rate band will be increased in line with the increase in the Consumer Prices Index from 2021/22 onwards. Each individual is entitled to their own main residence nil rate band, which is available in addition to the existing nil rate band, set at 325,000. As is the case with the existing nil rate band, if a person dies without using their full main residence nil rate band, the unused proportion we will be available on the death of their spouse or civil partner.
The introduction of the main residence nil rate band will eventually allow a couple to pass on a family home worth up to 1 million free of inheritance tax. Direct descendants only. The additional relief for passing on a residence will only apply where the property is passed on to direct descendants, such as children or grandchildren. The measure does not benefit childless couples as the additional nil rate band is not available where the property is left to someone other than a direct descendant. This would be the case where, for example, a maiden aunt left her home to a niece.
Although the new nil rate band is only available for deaths that occur on or after 6 April 2017, the nil rate band will also be available where a person downsizes or on or after 8 July 2015, or ceases to own a home on or after that date and assets of an equivalent value, up to the additional nil rate band, are passed on to direct descendants after death.
Transferable main residence nil rate band
As with the nil rate band exemption, in the case of married couples on the second death any unused main residence nil rate band exemption of the first spouse to die can also be transferred and set off against the value of the estate.
High value estates
Those with high value estates (in excess of 2 million) will not be able to benefit from the full amount of the additional nil rate band. The additional nil rate band is reduced by 1 for every 2 by which the estate exceeds 2 million. For 2022/21, the additional nil rate band is lost completely where the estate exceeds 2.2 million.
Need to know
The additional nil rate band is only available where deaths occur on or after 6 April 2017 and where the property is left to a direct descendent. The relief is reduced where the value of the estate exceeds 2 million.
Using your IHT exemptions wisely is an important part of estate planning. Should you want to find out more; are thinking of making a will; or might need your existing will reviewed in light of these changes then please contact us for advice.
Get in touch
To find out more or to find out how we can help you, call us on 01865 721 451