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Estate planning: understanding the residence nil-rate band

Inheritance tax receipts continue to break records, with the Treasury netting an extra £164 million from the unpopular levy in 2018/19.

Despite that, only around 4% of the wealthiest estates are liable to pay it. Part of that is down to efficient estate planning, and making full use of the residence nil-rate band.

The residence nil-rate band increased from £125,000 to £150,000 from 6 April 2019, allowing you to pass on your family home and potentially save on death duties.

How does it work?

When someone dies, inheritance tax is charged at 40% on any value of their estate that exceeds the tax-free threshold.

The current inheritance tax threshold, which has remained unchanged for 10 years now, stands at £325,000, so no inheritance tax has to be paid on estates up to that value.

If the deceased’s estate is worth more than this, and they died after April 2017, they may be entitled to an additional threshold, known as the residence nil-rate band.

This applies to a family home that is passed on to direct descendants, including children, step-children, grandchildren, or the spouse or civil partner of a direct descendant.

The residence nil-rate band will go up for the final time in 2020/21, to £175,000, and in following years it will rise in line with inflation.

Which homes qualify?

Put simply, the deceased needs to own or have part ownership of a property that was their residence at some point during the period they owned it.

This residential property doesn’t have to be their main residence, but it doesn’t qualify if they never lived there at some point.

To qualify, it must be included in the estate of the person who died, and left to their descendants either through their will, through intestacy, or by some other legal means.

Additionally, the descendants must become entitled to the home at the time the person dies, and not at a later date.

Only one property can qualify, so if someone owns more than one home, the executor of their will can choose which one to use for the residence nil-rate band.

Tapering for large estates

For individuals with an estate worth more than £2 million, additional rules apply that gradually reduce the amount they can pass on tax-free.

The residence nil-rate band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

As a result, anyone with an estate worth more than £2.3m will lose the entire additional band in 2019/20.

Contact us

Several other rules apply to the residence nil-rate band that you should be aware of if you’re making arrangements for your estate.

As part of our estate planning service, we can advise you on those rules, as well as helping you to draw up and review your will, make full use of any exemptions on lifetime transfers, and transfer assets into a trust if needed.

Contact us at 01628 631056 or email tracya@knightandcompany.co.uk for more information on planning your estate.