The Main Residence Nil Rate Band (MRNRB) for Inheritance Tax (IHT) came into effect this month. The relief has the potential to generate significant IHT savings as long as qualifying criteria are met. Here is a reminder of how estates can benefit.
The MRNRB commenced on 6 April 2017 and the allowance will be phased in as follows:-
- 2017/18 - £100,000.
- 2018/19 - £125,000.
- 2019/20 - £150,000.
- 2020/21 - £175,000.
From 2021, the allowance will increase by the consumer price index. In the meantime, the individual transferable nil rate band (NRB) will be frozen at £325,000 until 2021.
The value of the allowance will either be the net value of the interest in the main residence after deduction of liabilities (but before reliefs and exemptions), or the maximum amount of the band. Any unused band will be transferable to the estate of the surviving spouse/civil partner, irrespective of when first death occurred, provided second death occurred after the introduction of the band on 6 April 2017.
Where the value of the deceased’s net estate exceeds £2 million (again, after deduction of liabilities but before reliefs and exemptions), the band will be reduced by £1 for every £2 that the net estate exceeds the limit. Larger estates will therefore not benefit from this new relief.
For the purposes of the allowance, the main residence must be left to a direct descendant which is defined as a child, step, adopted or foster child of the deceased and their lineal descendants. It will also include spouses/civil partners of the direct descendant, or their widow/widower, provided that the spouse/civil partner has not re-married before the death of the deceased. Any existing wills that have not left the main residence to a direct descendent will not be eligible for this relief. The common use of Will Trusts following second death will therefore need to be reviewed.
It is intended that the MRNRB will be applied to the deceased’s interest in a residential property, which has been their residence at some point. The band will only be available on one residential property, although the executors will be able to elect which property to apply the allowance to, if there is more than one qualifying residential property in the estate. In situations where the deceased has downsized or sold their residence, the allowance will still be available, provided the sale took place after 8 July 2015. The technical detail of how the band will be calculated in cases where downsizing has occurred is complex and specific advice needs to be obtained.
Please contact Jane Hamilton us if you would like to review your IHT planning.