The new “main residence nil rate band” (MRNRB) will be introduced from April 2017 specifically to protect the family home for Inheritance Tax (IHT). This change comes following the Conservative party’s 2015 election manifesto stating it would ‘remove the family home out of tax by increasing the effective IHT threshold for married couples and civil partners’.
This new modification will be in addition to an individual’s own nil-rate band, currently £325,000. This means that for married couples and civil partners there is a possible £1 million relief on IHT from April 2020.
The MRNRB will not be introduced until April 2017 and will be introduced in phases over 4 years. The starting point in April 2017 for the MRNRB is £100,000 and will increase by £25,000 each tax year until 2020. For deaths in the following tax years the relief will be as follows:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
The legislation introducing the MRNRB has a number of key points that must be met in order for individuals to benefit from the additional tax free amount on death.
Who can benefit from the MRNRB?
The MRNRB is only available to people who die on or after 6 April 2017 with a residential interest in a property, this means the deceased must have been resident in the property before death. Anyone who predeceases this date will not benefit from the added relief.
Furthermore, in order for the MRNRB to apply the main residence must pass to direct descendants of the deceased (including children, adopted, foster or step children) and their lineal descendants.
As with the individuals existing nil-rate band, any unused MRNRB will be transferred to the deceased’s spouse or civil partner’s estate, potentially doubling the maximum amount available. This can also be done if the first of the couple died before 6 April 2017, even though the MRNRB wasn’t available at that time.
For estates valued at more than £2 million, the MRNRB (and any transferred MRNRB) will be gradually withdrawn or tapered away.
Gifts and trusts made during a person’s lifetime
Unlike the existing individuals nil-rate band, the MRNRB is only available on an estate of someone who has died. It cannot be used to apply to any lifetime gifts or trusts that have been set up by individuals.
The MRNRB only applies to the deceased’s home where it is both included in the deceased’s estate and lived in at some stage by the deceased before their death.
If the deceased downsized or disposed of their home before they died, the MRNRB may also apply against the former home in certain circumstances.
The home doesn’t have to be a person’s main home or have been owner for a minimum period of time to be included within the MRNRB. It is also possible where the deceased owned more than one property that their personal representatives can nominate which property should qualify for the MRNRB.
The nominated home doesn’t have to be in the UK but it does have to be within the scope of IHT.
All the above points effecting the eligibility of the property can be taken into account and require thorough advice to ensure the correct approach is taken.
This new piece of legislation has provided greater flexibility within individual’s estates allowing for the financial burden of IHT to be cut significantly.