As widely anticipated, in his summer 2015 Budget, the Chancellor announced measures that will eventually allow couples to pass on their family home to their children or grandchildren free of inheritance tax, as long as the home is not worth more than £1 million. However, the relief, taking the form of a main residence nil rate band in addition to the general nil rate band, is being phased in progressively and the £1 million limit will not be reached until 2020/21.
Additional nil rate band
For deaths that occur on or after 17 April 2017 and additional nil rate band, the main residence nil rate band will be available when a residence is passed on to a direct descendant. The main residence nil rate band is set at:
- £100,000 for 2017/18;
- £125,000 for 2018/19;
- £150,000 for 2019/20; and
- £175,000 for 2020/21.
The main residence nil rate band will be increased in line with the increase in the Consumer Prices Index from 2021/22 onwards.
Each individual is entitled to their own main residence nil rate band, which is available in addition to the existing nil rate band, set at £325,000. As is the case with the existing nil rate band, if a person dies without using their full main residence nil rate band, the unused proportion we will be available on the death of their spouse or civil partner.
The introduction of the main residence nil rate band will eventually allow a couple to pass on a family home worth up to £1 million free of inheritance tax.
Direct descendants only
The additional relief for passing on a residence will only apply where the property is passed on to direct descendants, such as children or grandchildren. The measure does not benefit childless couples as the additional nil rate band is not available where the property is left to someone other than a direct descendant. This would be the case where, for example, a maiden aunt left her home to a niece.
Although the new nil rate band is only available for deaths that occur on or after 6 April 2017, the nil rate band will also be available where a person downsizes or on or after 8 July 2015, or ceases to own a home on or after that date and assets of an equivalent value, up to the additional nil rate band, are passed on to direct descendants after death.
High value estates
Those with high value estates (in excess of £2 million) will not be able to benefit from the full amount of the additional nil rate band. The additional nil rate band is reduced by £1 for every £2 by which the estate exceeds £2 million. For 2022/21, the additional nil rate band is lost completely where the estate exceeds £2.2 million.
Need to know:
The additional nil rate band is only available where deaths occur on or after 6 April 2017 and where the property is left to a direct descendent. The relief is reduced where the value of the estate exceeds £2 million.