Hentons logo

Residence nil-rate band to rise again

HMRC is on course to collect more than £5.5 billion in inheritance tax receipts when the curtain comes down on 2018/19, forecasters have claimed.

The Office for Budget Responsibility (OBR) anticipates an increase of £300 million on the previous year's inheritance tax receipts total of £5.2bn when the current tax year ends on 5 April 2019.

Receipts have been steadily rising over the past nine years, with soaring property prices dragging more estates in the inheritance tax net.

Inheritance tax is charged at 40% on all estates worth more than £325,000, although the levy is only deducted on the value of the estate that exceeds this threshold.

For instance, your estate is worth £500,000 and your basic nil-rate band is £325,000. Inheritance tax will be charged at 40% of the excess - £175,000 - before what is left goes to your beneficiaries.

In this specific example, £70,000 in inheritance tax would go to the Treasury before the remainder - £105,000 - goes to the people or causes that mean the most to you.

Two years ago, amid a background of rising property prices, the Government introduced an extra allowance of £100,000 per person for family homes passed to children or grandchildren.

This residence nil-rate band, or family home allowance as it is otherwise known, works on top of the £325,000 threshold and can be combined with your spouse or civil partner's allowance.

Residence nil-rate band: how does it work?

Introduced on 6 April 2017, the residence nil-rate band enables you to pass on your family home and potentially save on death duties.

It introduced an extra £100,000 inheritance tax allowance when passing on the family home to your children or grandchildren, and this additional threshold increased to £125,000 on 6 April 2018.

This gives you a tax-free total of £450,000 in 2018/19, with inheritance tax charged at 40% on the portion of estates exceeding this.

Spouses and civil partners can also transfer the basic nil-rate band and the residence nil-rate band on death, making it possible for couples to pass on a family home worth up to £900,000 in 2018/19.

Residence nil-rate band: is my estate eligible?

Your estate will qualify for the residence nil-rate band if you owned a home and it is included in your estate and left to children or grandchildren when you die.

Stepchildren, foster children, adopted children and lineal descendants can also benefit from the family home allowance.

Residence nil-rate band: what's changing?

For the second successive year since its introduction in April 2017, the residence nil-rate band will increase by £25,000 - from £125,000 to £150,000 per person - on 6 April 2019.

This makes it possible for spouses or civil partners to bequeath a family home worth up to £950,000 in 2019/20.

The final increase of £25,000 - from £150,000 to £175,000 per person - remains on course to be introduced in April 2020, enabling couples to pass on a home worth £1m without incurring tax.

The basic nil-rate band remains unchanged at £325,000 for 2019/20, although a wider reform of inheritance tax has been mooted by the Office for Tax Simplification.

Residence nil-rate band: possible exclusions

If you have a large estate, the amount you can pass on tax-free gradually reduces through a process known as tapering.

The residence nil-rate band reduces by £1 for every £2 your estate is worth more than £2m, so you will lose your entire family home allowance if your estate exceeds £2.25m in 2018/19.

From 6 April 2019, your entire residence nil-rate band will be lost if your estate is worth more than £2.3m.

There are also tax traps in place for receiving gifts left by will or trust, so it's wise to seek professional advice when placing assets or gifts into a will or trust to ensure they secure relief.

Get in touch for help planning your estate.

back to top