In simple terms every UK resident and non-resident with UK based assets is entitled to use a basic inheritance tax nil rate band of up to £325,000. This band generally applies to lifetime gifts to certain types of trust, but mostly to accumulated net capital as at date of death, after all exemptions have been applied such as reliefs for spousal gifts, charity gifts and qualifying business assets. Any balance above the nil rate band attracts a flat 40% inheritance tax charge.

Should we have made any potentially exempt gifts of cash or assets to individuals within 7 years of date of death, the total value of these gifts after any exemptions will reduce or extinguish the nil rate band available at date of death.

The nil rate band has been frozen at £325,000 per person for a number of years and will remain frozen until 2020/21.

In 2015 the Government decided to enhance the nil rate band at date of death (where that occurs after 5th April 2017), by introducing the residential nil rate band where the deceased’s nominated taxable residence (wherever in the world) is inherited by direct descendants.

The value of this residential nil rate band will be up to £100,000 per individual for deaths occuring in tax year 2017/18 (so total nil rate band increased to maximum of £425,000), rising to £175,000 (so total nil rate band maximum £500,000) where death occurs after 5th April 2020. The value of the residential nil rate band will subsequently rise by inflation. The value of the residential nil rate band (but not the £325,000 basic nil rate band) will be reduced by £1 for every £2 net capital at date of death exceeds £2m. The value of potential exempt lifetime gifts will not reduce the residential nil rate band as this only applies to qualifying gifts arising at date of death.

As with the basic nil rate band, where one spouse leaves a share in the nominated taxable residence to the surviving spouse, the percentage of any unused residential nil rate band will be transferable to the surviving spouse. If the pre-deceased spouse died before 6th April 2017 a residential nil rate band of up to £100,000 will be transferable. The taper rules where a spouse’s total net capital exceeds £2m will also apply to the transferred residential nil rate band.

Should the individual downsize or sell their taxable residence (perhaps to go into a nursing home) after 7th July 2015, the executors will still be able to claim residential nil rate band on their death where assets are left to direct descendents, assuming that the £2m+ net capital taper restriction does not apply to their estate.

In order for executors of a deceased individual to be able to claim the residential nil rate band, the estate must include an interest in a nominated taxable residence (choosing where there is more than one residence) or the deceased must have owned such an interest at some point after 7th July 2015. Their Will must have left an interest in the nominated taxable residence (or other assets where it has been sold since 7th July 2015) either directly or via a life interest trust to direct descendants (including step-descendants) and/or their spouses.

In order to maximise the benefit of the residential nil rate band it is vital to plan and take professional advice, as this is a relatively complex and new area of inheritance tax. Shaw Gibbs are happy to provide such tax advice and work with your solicitor and IFA to ensure that overall you have effective and tax efficient succession plans in place.