RESIDENCE NIL RATE BAND…
It’s dead easy, Right?

There’s a big crow outside the window. She looks wise, endlessly looking round, surveying her territory. It is hers pretty much for life. She’s cawing. I bet she’d understand the residence nil rate band. Well, someone must.

nil rate band

As my corvid friend flies off, I think wouldn’t it be a great idea to try and explain how this thing works. Maybe, a series of irregular blogs looking at the unexpected intricacies of what was originally presented as something rather simple. You own a house and you’re married? Congratulations, your family (remember, it’s not you or your significant other) gets a million tax free, care of George Osborne[1].

So, where to begin our journey? How about how the taper works.

The taper comes into play where the value of the death estate is more than £2 million. This includes any trust funds that fall into the estate and the deduction of any allowable liabilities.

It ignores any IHT exemptions and reliefs and any lifetime gifts made in the 7 years before death. What does this mean in practice? Meet Krysten. She’s dead.

Krysten died in September last year. She was divorced so her estate only has one nil rate band available to use. Krysten was a good woman and left £100,000 to a few charities in her will. Everything else goes to her son, Lawson, including £300,000 she held in AIM shares which qualify for 100% business relief.

Krysten’s death estate works out like this:

As Krysten’s estate on death exceeds £2 million, the taper applies to the residence nil rate band available. The taper reduces the residence nil rate band by £1 for every £2 the estate on death exceeds £2 million. So, in Krysten’s case this reduces her residence nil rate band by (£290,000 / 2) £145,000. As the residence nil rate band is £100,000 in 2017/2018, Krysten’s estate doesn’t have a residence nil rate band.

Using the exemptions and reliefs available, the IHT payable on Krysten’s estate is:

Now, imagine that Krysten had some kind of second sight and gave Lawson £300,000 from the cash ISA a couple of months before she died. Krysten’s death estate would be:

Krysten’s estate on death would now be less than £2 million and the full residence nil rate band for 2017/2018 of £100,000 would be available as she is leaving her home to Lawson.

The gift to Lawson is a PET which using Krysten’s £3000 gift exemptions for 2016/2017 and 2017/2018 would be for £294,000. As Krysten would have died within 7 years of making the gift, this PET would fail as Krysten and the standard nil rate band available to Krysten’s estate would be:

The IHT payable on Krysten’s estate would now be:

Krysten’s second sight would have made Lawson £42,400 richer. Caw.

Next time, how the residence nil rate band can be transferred between spouses and civil partners.

 

 

[1] The average house price in the UK in October 2017 was £223,000. Source: Land Registry.

Author: Matthew Blackburn

Technical Services Consultant – Matthew has been involved in financial services for more than 20 years, has been a mainstay of Paradigm Technical Services since 2010 and is a technical ‘wizard’ in the areas of pensions, taxation and trusts.

In his other life, Matthew spends time at the Etihad Stadium, in dingy music venues and watching Netflix. He likes Germany, squid and fine art in equal measure.