Introduced in April 2017, the main residence nil-rate band is an extra property allowance that allows people to leave their homes to family tax-free.
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died; There’s normally no Inheritance Tax to pay if either: the value of your estate is below the £325,000 threshold; you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
The Treasury has announced, contrary to previous Budget statements, that the Nil Rate Band of £325,000 – the current amount of an estate that can be inherited tax free – is to remain the same until 2019 and will not increase in line with inflation. It has been widely reported in the press that more than £1 billion is expected to be generated in annual tax revenue that is due to fund care for the elderly. Until now, relatively few estates are required to pay inheritance tax. However, the impact of this decision will mean that by 2019 approximately 5,000 more estates will be caught by it.
(If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £950,000.)
Under the rules, if you’re passing your home to a direct descendant, you can benefit from an additional £150,000 in tax-free allowance in the 2019-20 tax year.
At launch two years ago, the allowance was £100,000. It is set to increase again to £175,000 in April 2020.
The allowance only applies if you leave your home to a direct descendant – either a child or grandchild. Nieces and nephews, or friends do not qualify.
Not everyone will qualify for the full allowance. If your total estate is worth more than £2m, the extra allowance tapers off, falling by £1 for each £2 above the threshold.