Inheritance tax: Residence nil-rate band in 2019/20
31st May 2019
It’s hard to believe the residence nil-rate band is already into its third year, after coming into force back in April 2017.
The residence nil-rate band is an inheritance tax break that works on top of the existing £325,000 nil-rate band.
It initially allowed you to bequeath an extra £100,000 tax-free on top of the existing nil-rate band if you were passing on your home to a direct descendant.
In most cases ‘direct descendants’ means children or grandchildren, great-grandchildren and stepchildren.
The residence nil-rate band increased by £25,000 to £125,000 in April 2018, and the same £25,000 increase took this tax-free allowance to £150,000 for 2019/20.
Using the residence nil-rate band in 2019/20
If you come to us asking for help planning your estate this year, the residence nil-rate band can be an effective tax-saving strategy.
It’s possible to protect the £475,000 of estates worth less than £2 million from inheritance tax if you pass on the family home to a direct descendant in 2019/20.
For estates over £2 million the extra allowance tapers by £1 for every £2 over £2 million.
Inheritance tax is deducted at 40% on the remaining value of your estate.
Transferring the residence nil-rate band in 2019/20
It is possible to protect more of your estate’s value from inheritance tax if your spouse or civil partner is still alive.
If one of you were to die in 2019/20, you could transfer your £150,000 residence nil-rate band to your surviving spouse or civil partner.
The survivor would then have their own £150,000 allowance on top of your tax-free allowance, taking their residence nil-rate band to £300,000 in 2019/20.
As the inheritance tax nil rate band of £325,000 can be transferred to surviving spouses and civil partners, it would be possible for you or your partner to protect £950,000 of your joint estate from tax in 2019/20, assuming no gifts have been made in the last seven years.
Residence nil-rate band 2019/20 example
For the purposes of an example, let’s say Sally’s husband died five years ago and she still resides in the family home.
Her husband left all his estate to Sally. Therefore, Sally gained her husband's nil-rate band of £325,000. There was not a residence nil rate band available to transfer when Sally’s husband died.
Sally’s estate, including the family home, is valued at £900,000 and she wishes to bequeath the home to her only grandchild. The family home has been valued at over the residence nil-rate band of £150,000.
If she were to die in 2019/20, and assuming she made no gifts in the last seven years, £800,000 of her estate would be tax-free.
The remaining £100,000 of her estate would be taxed at 40% (£40,000), leaving her grandchild in line to inherit assets, including the family home, of £860,000.
What does the future hold for the residence nil-rate band?
2019/20 doesn’t mark the end of the £25,000 incremental increases, the final one will raise the residence nil-rate band to £175,000 from 6 April 2020.
While that spells the end for the phased increases in this inheritance tax break, all future rises are likely to be in line with the Consumer Prices Index (CPI).
With the most recent CPI remaining subdued at 1.8% in March 2019, according to the Office for National Statistics, any future increases to the residence nil-rate band are likely to be nowhere near as generous as it currently stands.
Making the most of the residence nil-rate band, wherever possible, is an important part of our estate planning service.
Drop us an email at firstname.lastname@example.org or pick up the phone and call us on 0117 305 2600 to find out more.