IHT: changes to residence nil rate band
Published 29 October 2018
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Who is likely to be affected
Individuals with direct descendants who have an estate (including a residence) with total assets above the Inheritance Tax threshold (or nil-rate band) of £325,000 may be affected, as well as personal representatives of deceased persons.
General description of the measure
This measure introduces minor technical amendments to the residence nil rate band (RNRB) relating to downsizing provisions and the definition of ‘inherited’ for RNRB purposes. These amendments clarify the working of the downsizing rules, and provide certainty over when a person is treated as ‘inheriting’ property.
Policy objective
The RNRB reduces the burden of Inheritance Tax for most families by making it easier to pass on the family home to direct descendants without an Inheritance Tax charge. This measure will ensure that the RNRB is working in line with the original policy intent, meaning that it cannot be claimed outside of the intended scope and removing any uncertainty for taxpayers.
Background to the measure
This measure was announced at Budget 2018.
The RNRB was announced at Summer Budget 2015 and commenced on 6 April 2017. The RNRB is an additional Inheritance Tax nil-rate band, conditional on a residence being passed on death to a direct descendant. This is currently £125,000, and will rise to £150,000 in 2019 to 2020, and £175,000 in 2020 to 2021. There is a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. This is at a withdrawal rate of £1 for every £2 over this threshold. Any unused RNRB can be transferred to a surviving spouse or civil partner. It is also available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
Detailed proposal
Operative date
The measure will have effect for deaths applying on or after 29 October 2018.
Current law
The current legislation for RNRB can be found in Sections 8D-M of the Inheritance Tax Act 1984. The downsizing provisions were inserted by section 93 of, and Schedule 15 to, the Finance Act 2016.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19 to amend:
- Section 8FE Inheritance Tax Act 1984 to ensure that the value of any part of a residence that is inherited by an exempt beneficiary is taken into account in determining a person’s lost relievable amount
- Section 8J Inheritance Tax Act 1984 to ensure that where a residence forms part of a person’s estate immediately before their death as a gift with reservation of benefit, in accordance with Section 102(3) FA 1986, it will only be treated as being inherited by a direct descendant if the property became immediately comprised in the direct descendant’s estate as a result of the original gift
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| nil | nil | nil | nil | nil | nil |
This measure supports the Exchequer in its commitment to protect revenue.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure will ensure that the policy is working as originally intended and will continue to benefit individuals by making it easier to pass on the family home to direct descendants without a tax charge. This may have a positive impact on family formation, stability and breakdown as it will help to ensure families are able to keep their family home.
Equalities impacts
This measure will ensure that the policy is working as originally intended and will continue to benefit individuals with protected characteristics who are part of family group.
Impact on business including civil society organisations
This measure is expected to have no impact on businesses or civil society organisations as it only affects individuals and trustees who pay Inheritance Tax in their personal capacity. Advisers and personal representatives of individuals may incur one-off costs of familiarisation with the change.
Operational impact (£m) (HMRC or other)
No IT or other changes are needed as a result of this measure. It is therefore not anticipated that implementing this change will incur any additional costs or savings for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from Inheritance Tax returns.
Further advice
If you have any questions about this change, contact Natalie Corbett on Telephone: 03000 599 885 or email: natalie.corbett1@hmrc.gsi.gov.uk.