Residence Nil Rate Band – Your questions answered!

What is the Nil Rate Band?

The Nil Rate Band is the threshold on which there is no Inheritance Tax to pay on your death.

The current Nil Rate Band threshold is £325,000. This means that if your estate is below this threshold then Inheritance Tax will not be charged on your estate. However, anything over this threshold is subject to a 40% Inheritance Tax charge.

What is the Residence Nil Rate Band?

The Residence Nil Rate Band is an additional tax-free allowance that is applied together with the Nil Rate Band, where certain conditions are met.

When does the Nil Rate Band Apply?

The Residence Nil Rate Band will apply if you leave either the whole or part of a qualifying property to be inherited by a direct descendant, these include:

• – Child or grandchild of the deceased
• – Step-child
• – Adopted or fostered children
• – Any child the deceased was appointed to as a guardian, whilst the child was under the age of 18.

If you choose to leave your estate to someone who is not a direct descendant, for example, a niece or nephew, then the Residence Nil Rate Band does not apply.

What is the value of the Residence Nil Rate Band in 2019/20?

From April 2019 if you leave property that you own to a direct descendant then the Residence Nil Rate Band is an additional £150,000.

What if I leave my estate to my spouse and then to my children?

Anything passing between spouse’s passes free of Inheritance Tax. On the second spouse’s death, they would have the benefit of having the Transferable Nil Rate Band, meaning they have their own Nil Rate Band together with any of their spouse’s unused Nil Rate Band. On top of this they would each have their own Residence Nil Rate Band which means that potentially up to £950,000 of the estate can pass free of Inheritance Tax.

What if I am cohabiting?

Unfortunately, cohabiting couples can end up paying more Inheritance Tax than married couples as they do not benefit from the spousal exemption or transferable Nil Rate Band. However, there may be alternative tax planning methods to consider when drafting Wills to relieve some of their Inheritance Tax burden.

What if my estate is over £2 million?

If your estate is over £2 million then the additional threshold is gradually reduced, even if the qualifying property has been left to a direct descendant. Once an estate is over £2 million this additional threshold is reduced by £1 for every £2 in excess of £2 million.

Do the changes in the Residence Nil Rate Band mean I need to update my Will?

We always advise that Wills are reviewed every 3-5 years or when circumstances change. We would recommend you review your Wills to ensure they do not preclude the availability of any potential Residence Nil Rate Band and to ensure your wishes are adhered to on your death.

Inheritance Tax Planning is a complex area of law and it is important when naming beneficiaries in your Will that you are fully informed of any tax implications that may arise.

For more information, advice or guidance on the Nil Rate Band or Residence Nil Rate Band, please contact our Wills team on either 01908 660966 or 01604 828282 or by email on wills@franklins-sols.co.uk