Residence nil-rate band increases for a third time

Inheritance tax receipts reached another record high of £5.369 billion in 2018/19, despite a relatively new allowance giving married couples and civil partners the facility to pass on a family home worth up to £900,000 tax-free last year.

According to HMRC, inheritance tax receipts increased by £164 million year-on-year in 2018/19 - a 3.1% rise on the £5.205bn total in 2017/18 - to reflect a steady increase which has been largely fuelled by soaring property prices.

For the last 10 years, since 2009/10, individuals in the UK have been able to bequest up to £325,000 without paying inheritance tax, while the residence nil-rate band (RNRB) - which works on top of the existing threshold - was introduced in 2017/18.

The RNRB, or family home allowance as its been dubbed in some quarters, initially added an extra £100,000 allowance per person for family homes passed on to direct descendants, such as children and grandchildren.

The Government had hoped its introduction would reduce the number of estates being dragged into the inheritance tax net, but the Revenue's latest statistics show this has not gone exactly to plan.

Property and inheritance tax

Since 6 April 2017, the RNRB has enabled eligible people to pass on a property to direct descendants and potentially save on death duties.
It introduced a £100,000 inheritance tax allowance when passing on a family home to children or grandchildren and works on top of the £325,000 basic nil-rate band.

The family home allowance available on an individual's estate has increased from £100,000 to £125,000 in 2018/19, before rising from £125,000 to £150,000 in 2019/20.

This gives a tax-free total of £475,000 in 2019/20, while an inheritance tax charge of 40% is charged on the portion of individuals' estates worth more than this.

Just like previous years, and much like the basic nil-rate band, it is possible to transfer any unused percentage of the RNRB from the first spouse or civil partner's estate which can be claimed on the death of the second spouse or civil partner.

What are the criteria?

When an individual dies, their estate will qualify for the RNRB if they owned a home, or a share of one, that is included in their estate and left to direct descendants.

These exclusively include children, grandchildren, stepchildren, foster children, adopted children and their lineal descendants.

What's changing?

Much like the basic nil-rate band, which remains unchanged at £325,000 in 2019/20 for a tenth year in a row, the family home allowance is transferable between spouses and civil partners.

However, unlike the basic nil-rate band, the RNRB has increased from 6 April 2019 - to £150,000.

This makes it possible to claim an inheritance tax exemption of £475,000 in 2019/20 for individuals and £950,000 for spouses and civil partners, if they meet the criteria.

The final increase will take place on 6 April 2020, after which a couple will be able to bequeath a home worth £1m without incurring inheritance tax.

Other considerations

Estates valued above the £2m taper threshold lose £1 of relief for every £2 excess. This applies to the total value of the estate, including any trusts.

There are also tax traps in place for receiving gifts left by will or trust, so it's wise to seek professional advice when placing assets or gifts into a will or trust.

Get in touch for help planning your estate.