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Inheritance Tax Relief Explained


Inheritance Tax Relief & Residence Nil Rate Band

Inheritance tax is a tax on the estate of an individual who has died. There is usually nothing to pay if the value of your estate is below the £325,000 threshold or, you leave everything above this to your spouse, civil partner or to a charity.

The Nil Rate Band

Everyone is entitled to a tax-free allowance (nil rate band) of £325,000 to be applied to their estate on death, whilst any assets above this amount are taxed at 40%. Since unused nil rate bands are transferable between spouses, a nil rate band of up to £650,000 can be available for the second
person to die.

The Residence Nil Rate Band

In April 2017 an additional nil rate band, the Residence Nil Rate Band (RNRB), was introduced, offering a further tax-free allowance for anyone passing a qualifying property – or a share of it – in their Will to direct descendants.

Caution must be taken if the deceased’s direct descendants have to be a certain age before they can inherit the property, as the RNRB would not apply if the property was held in trust.

What is a Qualifying Property?

Some inherited properties, such as buy-to-lets, which were never a residence of the deceased will not qualify. In estates which contain more than one property, it is up to the personal representatives to nominate which should qualify.

This also applies to residences that the deceased no longer owned at the time of their death, as long as they owned them on or after 8th July 2015, and the equivalent value is passed to the direct descendants.

The value of the qualifying property for RNRB purposes will be its open market value less any liabilities secured over the property such as a mortgage.

There will be a tapered withdrawal of the additional relief for estates with a net value of more than £2 million. For some, they may not see any benefit from the extra nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2 million.

This additional tax relief has started to be phased in taking effect on deaths on or after 6th April 2017. In 2020 to 2021, it increased to £175,000. From 2021 to 2022 onwards, the tax relief will increase in line with the Consumer Prices Index.

All of this means that when you combine the basic IHT nil rate band of £325,000 with the full RNRB of £175,000 each, married couples will have a nil rate band of £1million. Any unused RNRB is transferable to the deceased’s spouse or civil partner’s estate when they die and leave a home to
their direct descendants.

We recommend keeping your Wills under constant review to cater to changing circumstances and legislative change. Get in touch today to see how we can help.

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