In 2015 the Conservative party election manifesto promised to “take the family home out of tax by increasing the effective inheritance tax threshold for married couples and civil partners to £1 million”. This will be achieved by 2020 through the introduction of the residential nil rate band (RNRB), worth up to £175,000 per person.
When the residential band is combined with the frozen nil rate band of £325,000, an individual will have a total nil rate band of £500,000. The £1 million headline is achieved by doubling up the £500,000 total for a married couple or civil partners. However, the RNRB is set at £100,000 for deaths in 2017/18, and increases by £25,000 each year to £175,000 for deaths on and after 6 April 2020.
The RNRB is not as flexible as the main NRB, as it can only apply if value derived from the deceased’s home is inherited on death by a direct descendant of the deceased. Thus, the deceased must have a child, grandchild or great grandchild to pass the value on to, although step-children, foster children and the spouses of those individuals also count as direct descendants. The RNRB is not ring-fenced to the value of the home, it is applied to the entire estate on death.
Any unused the RNRB can be passed on to a spouse, just like the basic NRB. This carry forward of the RNRB also applies if the first spouse died before 6 April 2017, when the RNRB took effect. The first spouse to die did not have to own a property (see IHTM46040).
The RNRB is tapered away by £1 for every £2 of the estate value which exceeds £2 million. That gross value is calculated before any reductions for business property or agricultural property relief. A further complication is that the RNRB can apply if the deceased sold their home on or after 8 July 2015 to downsize or to move into a care home.
The rules are certainly not straightforward, so please ring our office if you need any further clarification.