Inheritance tax: introducing the main residence nil-rate band

On 6 April 2017, the government introduced the new inheritance tax (IHT) residence nil-rate band (RNRB) - a measure designed to reduce the IHT burden for families. The RNRB makes it easier to pass a main residence on to direct descendants without incurring a tax charge.

How does the RNRB work?

The new RNRB is in addition to the existing IHT nil-rate band for individuals (currently £325,000). It is being phased in between now and 2021 as follows:

• £100,000 in 2017–2018
• £125,000 in 2018–2019
• £150,000 in 2019–2020
• £175,000 in 2020–2021

This means, by 2021, descendants could avoid paying IHT on up £1 million, as each parent would have a nil-rate band of £325,000 plus an RNRB of £175,000. Importantly, the RNRB only applies when the family home will pass down to direct descendants (children, grandchildren, etc.). The RNRB will gradually reduce, or taper away for an estate worth more than £2 million, even if a home is left to direct descendants.

The additional threshold will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

Who will this affect?

This measure will affect any individual with direct descendants and an estate (including a main residence) worth more than the nil-rate band of £325,000. At Ascot Lloyd, we are definitely in favour of any kind of tax-free allowance. However, quite how many people will benefit from this new allowance remains to be seen. Reports suggest the RNRB may only benefit 0.04% of the population.

What this means for your estate

There is a lot of complexity around IHT and the new RNRB so it’s a good idea to get specialist advice from both a financial adviser and solicitor.

You may need to update your will to ensure your family benefits fully from the new allowance. Many people choose to divide assets between direct descendants and other relatives (such as nieces and nephews), but the new RNRB means it is more tax efficient to leave your main residence only to direct descendants, and other assets to other beneficiaries.

Essentially, you need to ensure you allocate the various parts of your estate are accordingly. This is worth doing to ensure your children and other direct descendants benefit from the additional tax-free allowance.

Talk to our expert advisers to find out how we can help you navigate all aspects of IHT, and minimise the tax burden for your loved ones.