Owning a residence which is left to direct descendants
The Inheritance Tax residence nil-rate band came into effect on 6 April 2017. It provides an additional nil-rate band where an individual dies after 6 April 2017, owning a residence which they leave to direct descendants. During the 2019/20 tax year, the maximum residence nil-rate band available is £150,000. This rises to £175,000 in 2020/21, after which it will be indexed in line with the Consumer Prices Index.
The residence nil-rate band is set against the taxable value of the deceased’s estate – not just the value of the property. Unlike the existing nil-rate band, it doesn’t apply to transfers made during an individual’s lifetime. For married couples and registered civil partners, any unused residence nil-rate band can be claimed by the surviving spouse’s or registered civil partner’s personal representatives to provide a reduction against their taxable estate.
Special provisions apply where an individual has downsized
Where an estate is valued at more than £2 million, the residence nil-rate band will be progressively reduced by £1 for every £2 that the value of the estate exceeds the threshold. Special provisions apply where an individual has downsized to a lower value property or no longer owns a home when they die.
For these purposes, direct descendants are lineal descendants of the deceased – children, grandchildren and any remoter descendants together with their spouses or registered civil partners, including their widow, widower or surviving registered civil partner – a step, adopted or fostered child of the deceased or a child to which the deceased was appointed as a guardian or a special guardian when the child was under 18.
Any unused allowance can’t be offset against other assets
The amount of residence nil-rate band available to be set against an estate will be the lower of the value of the home, or share, that’s inherited by direct descendants and the maximum residence nil-rate band available when the individual died. Where the value of the property is lower than the maximum residence nil-rate band, the unused allowance can’t be offset against other assets in the estate but can be transferred to a deceased spouse or registered civil partner’s estate when they die, having left a residence to their direct descendants.
A surviving spouse or registered civil partner’s personal representatives may claim any unused residence nil-rate band available from the estate of the first spouse or registered civil partner to die. This is subject to the second death occurring on or after 6 April 2017 and the survivor passing a residence they own to their direct descendants. This can be any home they’ve lived in – there’s no requirement for them to have owned or inherited it from their late spouse or registered civil partner.
Survivor’s estate will benefit from subsequent increases
The facility to claim unused residence nil-rate band applies regardless of when the first death occurred – if this was before it was introduced, then 100% of a deemed residence nil-rate band of £150,000 can be claimed, unless the value of the first spouse or registered civil partner’s estate exceeded £2 million, and tapering of the residence nil-rate band applies.
The unused residence nil-rate band is represented as a percentage of the maximum residence nil-rate band that was available on first death – meaning the amount available against the survivor’s estate will benefit from subsequent increases in the residence nil-rate band. The transferable amount is capped at 100% – claims for unused residence nil-rate band from more than one spouse or registered civil partner are possible but in total can’t be more than 100% of the maximum available amount.
Personal representatives can elect which property should qualify
Under the residence nil-rate band provisions, direct descendants inherit a home that’s left to them which becomes part of their estate. This could be under the provisions of the deceased’s Will, under the rules of intestacy or by some other legal means as a result of the person’s death – for example, under a deed of variation.
The residence nil-rate band applies to a property that’s included in the deceased’s estate and one in which they have lived. It needn’t be their main residence, and no minimum occupation period applies. If an individual has owned more than one home, their personal representatives can elect which one should qualify for residence nil-rate band. The open market value of the property will be used less any liabilities secured against it, such as a mortgage. Where only a share of the home is left to direct descendants, the value and residence nil-rate band is apportioned.
Depending on the type of Trust will determine whether the home is included
A home may already be held in Trust when an individual dies or it may be transferred into Trust upon their death. Whether the residence nil-rate band will be available in these circumstances will depend on the type of Trust, as this will determine whether the home is included in the deceased’s estate, and also whether direct descendants are treated as inheriting the property.
This is a complex area, and HM Revenue & Customs provides only general guidance, with a recommendation that a solicitor or Trust specialist should be consulted to discuss whether the residence nil-rate band applies. Limited by the value of other assets left to direct descendants
Estates that don’t qualify for the full amount of residence nil-rate band may be entitled to an additional amount of residence nil-rate band – a downsizing addition if the following conditions apply: the deceased disposed of a former home and either downsized to a less valuable home or ceased to own a home on or after 8 July 2015; the former home would have qualified for the residence nil-rate band if it had been held until death; and at least some of the estate is inherited by direct descendants.
The downsizing addition will generally represent the amount of ‘lost’ residence nil-rate band that could have applied if the individual had died when they owned the more valuable property. However, it won’t apply where the value of the replacement home they own when they die is worth more than the maximum available residence nil-rate band. It’s also limited by the value of other assets left to direct descendants.
Planning techniques are available to address a potential Inheritance Tax liability
The downsizing addition can also apply where an individual hasn’t replaced a home they previously disposed of – provided they leave other assets to direct descendants on their death. The deceased’s personal representatives must make a claim for the downsizing addition within two years of the end of the month in which the individual died.
Different planning techniques are available to address a potential Inheritance Tax liability, and these can be incorporated into the financial arrangements of any individual whose estate is likely to exceed the threshold.