What is the Residential Nil Rate Band and how can it reduce inheritance tax?

A terraced house on a typical London street with the sun shining on it
Have you heard about the recent changes to inheritance tax (IHT)? New laws were passed last year to increase the overall sum you can leave to your direct descendants. However, as usual, the facts behind the headlines are never as clear cut as they first seem.

So, let’s take a quick look at everything you need to know about the residential Nil Rate Band and how it could affect you and your family.

What is the Residential Nil Rate Band worth?

Under English law, everyone is entitled to pass on up to £325,000 tax-free to their loved ones. However, if you own a property you are now allowed to add an extra £125,000 to this amount.

This takes your overall tax-free allowance to £450,000.

This is due to rise by £25,000 each year until 2020.

In 2019 the overall tax-free amount you can bequeath rises to £475,000

In 2020 this will rise again to £500,000.

What if I am married?

If you are married, or in a civil partnership, you may pass this tax saving on to your spouse in the event of your death. This means that couples can benefit from as much as £800,000 if they fulfil the required criteria.

By 2020 the maximum joint amount will have risen to £1,000,000.

This is the big shiny number splashed across certain newspapers, which explains why some people have become confused about their overall tax-free allowance today.

Who is eligible for the Residential Nil Rate Band?

Anyone who has property as part of their estate is entitled to this additional tax-allowance. It is an important point, as anyone leaving over £325,000 in their Will us still taxed at 40% on everything above that amount if there is no property in the Will.

Secondly, there are strict criteria around who you can leave your property to if you want them to benefit from this extra tax-allowance.

In order to benefit, your beneficiaries must be your direct descendants. This means that they must fall under one of the following categories:

• Children and their spouses or civil partners
• Grandchildren and their spouses or civil partners
• Great-grandchildren and their spouses or civil partners
• Stepchildren
• Adopted children
• Foster children
• Children who were under the guardianship of the people passing on their estate

Perhaps contentiously, this means that your nieces and nephews, brothers, sisters or other blood-relatives cannot benefit from the extra tax savings if your home is passed on to them.

What if you own more than one property?

If you are lucky enough to own multiple properties, the executor of your Will may decide which of them is counted as your main property.
However, they must be able to show that you did live in this property at some point. Any buy-to-let properties will not count.

Still confused?

We’re here to guide you through these complex inheritance planning issues. If you are considering any changes to your Will or need to review how your estate is currently liable for Inheritance Tax, contact the office today and one of our team will help give you the advice you need.

Image: Jeff Easter (Creative Commons)

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