House and home: the main residence nil rate band

One of the Conservatives’ main pledges before the 2015 election was that, if they won, they would increase the existing inheritance tax-free allowance of £325,000. It was part of a series of measures that were revealed fairly late in the day, in the hope that their somewhat lacklustre campaign might be given a kick up the backside.

Well it might have done the job, as we all know the rest of the story – the Tories went on to win the election, and there swiftly followed a Budget in which a higher inheritance tax-free threshold to start from April 2017 was announced. 

Now hold on there. You’ve heard of inheritance tax, right? Maybe just referred to as IHT. Good, we thought so. (But just in case, take a look at our page Inheritance tax.)

The announcement certainly looked like it might go some way to making up for the fact the current allowance of £325,000 has been frozen for the last six years. But when you begin to look at the detail, it’s not looking quite as rosy as it might be for some tax-payers.

Basically, to benefit from the newspaper-grabbing headline that you can leave up to £1 million before inheritance tax at 40% kicks in, you need to be:

  • married;
  • have children; and
  • own a house that is worth more than £1 million but less than £2 million.

But before we get too carried away with what’s going to happen in 2017, let’s just remind you of the current rules, in case inheritance tax legislation isn’t on your bedtime reading list…

Current rules

As things stand, everyone in the UK has an inheritance tax-free allowance of £325,000. So if you die as a single person, this is the amount that you can pass to anyone you choose free of inheritance tax (providing you’ve made a valid will - and we all know how keen we are on that topic). If your estate is worth more than £325,000, inheritance tax will only be charged on the amount over and above £325,000.

If, on the other hand, you’re married or in a civil partnership, your tax-free allowance can pass to your surviving spouse or civil partner when you die. And it can be added to their allowance, to be used on their death - giving a total allowance of £650,000. 

So what’s changing?

As from 2017-18, though, there’s going to be a new nil rate band. For main residences. Some people are calling it the family home allowance. But if you look on the HMRC website, you’ll see that they’ve given it the more descriptive (but perhaps less clear) title of main residence nil rate band – and they should know. Basically, however, it’s about the family home.

This band is going to start at £100,000 in its first year, and increase to £175,000 by 2020-21. When you add that to the £325,000, that means that if there’s a family home as part of the estate, the nil rate band will be £500,000.

And it gets better. As you know (yes, of course you did), a spouse doesn’t pay IHT. And if their deceased partner’s estate didn’t use up the whole of their nil rate band, the unused portion gets added to the surviving spouse’s allowance. Which means, potentially, two lots of £500,000 – or, yes, £1 million, which wouldn’t be subject to IHT.

Not a bad deal, we hear you saying. In fact, a pretty good deal. So why have so many feathers been ruffled by this increased tax-free allowance, something that usually sends everyone jumping for joy?

You’ve got to be kidding 

This new residence nil rate band is only going to count when property is passed down to children or grandchildren. Not siblings, nor nieces, nephews, godchildren… just children and grandchildren.

This doesn’t seem totally fair to us. And it certainly puts those people who choose not to have children, or indeed can’t, at a huge disadvantage.

The new rules put simplicity to one side, and introduce what many feel is an unnecessary degree of complexity. There are difficult to decipher rules for transferring the allowance when one spouse or civil partner has already died and for multiple marriages/civil partnerships.

And it doesn’t stop there. The rules extend to dealing with people who downsize and if a couple’s combined estate is worth over £2 million, the allowance starts reducing at a rate of £1 for every £2 over the threshold. 

Clear as mud?

If we haven’t already lost you, we certainly would if we went into the detail of the new provisions. They don’t exactly make for light reading but if you want to find out more details, see our page Nil rate band.

The upshot is that unless you fit exactly into some fairly strict criteria, you may need to enlist the help of a tax accountant or a lawyer to benefit from the new allowance. And we all know how much that could cost…

Nothing to write home about…yet

So if no-one really understands how the new rules will work and others are furious at having been left out, surely there must be a better solution? 

The Government could of course raise the existing allowance for everyone, regardless of whether they’re married, have children or who they want to pass their assets to. This would certainly appeal to the diversity of family structures in the UK today. But with the increased cost to the Government of this sort of measure, we may be waiting for some time before it’s on the agenda.

If you have any chance at all of taking advantage of the new allowance, you need to have a valid will in place. And you can get one by clicking on the button above.