Property Nil Rate Band of Inheritance Tax

Property Nil Rate Band of IHT.

Property Nil Rate BandThe Property Nil Rate Band of inheritance tax is designed to help the beneficiaries of folk leaving assets to direct descendants. It is potentially of benefit to people whose assets, including their home are above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000.  It will mean many people with taxable estate need to review their estate planning.

The Property Nil Rate Band adds extra nil-rate band when a residence is passed on death to a direct descendant. Of course, it isn’t quite as simple as that, but this is just an outline. We will be pleased to give more detailed advice as part of an Inheritance Tax Review, one of our specialist services. Anyway, this is how the additional property nil rate band grows:

It will be:

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

It should then grow in line with Consumer Prices Index (CPI).

Unused nil-rate band can be transferred to a surviving legal spouse or civil partner. Usefully, the extra nil-rate band will still be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equal value, up to the value of the extra nil-rate band, are passed on death to direct descendants.

For estates with a net value of more than £2 million, the property nil rate band will be cut by £1 for every £2 over £2 million.

The existing nil-rate band stays at £325,000 from 2018 to 2019 until the end of 2020 to 2021 and will then increase in line with CPI.

Only one residential property will qualify but personal representatives will be able to nominate which one if there is more than one. A property which was never a residence of the deceased, such as a buy-to-let property, will never qualify.

What is a “direct descendant” for Property Nil Rate Band purposes?

A child, step-child, adopted child or foster child of the deceased and the lineal descendants of such children.

A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the extra nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.

The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020 to 2021, after which it should increase with CPI.