Families have often faced substantial Inheritance Tax bills when leaving their home to the next generation. In 2018, a type of tax relief known as the ‘Residence Nil Rate Band’ (residence relief), was brought in to try and relieve this burden. It can be a very useful way of reducing an estate for tax purposes, but it isn’t automatically given. It must be claimed by the personal representatives dealing with a deceased person’s estate, and they can only do so if certain conditions are satisfied. If you think that your estate may be taxable, it’s well worth looking at your affairs now to make the most of any available relief after your day.
The basic Inheritance Tax rules
As a general rule, each individual can own up to £325,000.00 before Inheritance Tax is payable on their death. This threshold is called the ‘Nil Rate Band’. Anything over £325,000.00 is taxed at 40%. Of course, this is a very simplified version of the Inheritance Tax rules. The actual rules are very complex.
The residence relief is an additional type of relief that relates to your home. If you own a property, which passes to lineal descendants on your death, you can claim up to £175,000.00 additional Inheritance Tax relief. This means that an individual can leave assets of up to £500,000.00 tax-free.
One key point to note is that, to benefit from the residence relief, you need to pass your home to lineal descendants, i.e. children (including foster, adoptive, step-children), grandchildren, great-grandchildren, etc. It doesn’t apply if you leave assets to nieces and nephews, or other family members.
Another limit on the availability of the Residence Nil Rate Band is the tapering threshold. If you have an Estate worth more than two million pounds at the date of your death, you will lose £1 of the relief for every £2 that your estate exceeds £2 million.
If you own more than one property at the date of your death, residence relief can only be claimed against one of them. It is up to the personal representatives dealing with your estate to choose which property it should be applied to. The property in question must have been your residence at some time to qualify.
If you have down-sized, or sold your home to move into a care home, it is still possible to claim the residence relief, as long as the replacement property or sale proceeds pass to your descendants. Special conditions apply in these circumstances.
Overall, residence relief is a very useful way of saving tax in many cases, but due to the conditions that must be satisfied, we strongly advise that you speak to one of our specialist team to ensure that you are doing all you can to enable your family to claim it. If you would like to contact our Wills, Trusts and Probate team to discuss these tax reliefs, you can contact them on firstname.lastname@example.org and 01228 552222