Policy paper

Inheritance Tax: main residence nil-rate band and the existing nil-rate band

Updated 12 June 2017

Who is likely to be affected

Individuals with direct descendants who have an estate (including a main residence) with total assets above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000 and personal representatives of deceased persons.

General description of the measure

This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.

This will be:

• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be 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.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Policy objective

This measure will reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge.

Background to the measure

The measure was announced at Summer Budget 2015.

Detailed proposal

Operative date

The measure will take effect for relevant transfers on death on or after 6 April 2017. It will apply to reduce the tax payable by an estate on death; it won’t apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death.

The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.

The nil-rate band will continue to be £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Current law

Section 7 of the Inheritance Tax Act 1984 (IHTA) provides for the rates of IHT to be as set out in the table in Schedule 1 to that Act. The current table provides that the nil-rate band is £325,000.

IHT is charged at a rate of 40% on the chargeable value of an estate, above the nil-rate band, after taking into account the value of any chargeable lifetime transfers. The chargeable value is the value after deducting any liabilities, reliefs and exemptions that apply.

Where an estate qualifies for spouse or civil partner exemption, the unused proportion of the nil-rate band when the first of the couple dies can be transferred to the estate of the surviving spouse or civil partner, sections 8A-C IHTA. The nil-rate band can be transferred when the surviving spouse or civil partner dies on or after 9 October 2007, irrespective of when the first of the couple died, so that the nil-rate band can be up to £650,000. There’s currently no specific exemption for a residence, or for assets being transferred to children and other direct descendants.

Section 8(3) to Finance Act 2010 provides for the nil-rate band to be frozen at £325,000 up to and including 2014 to 2015. Section 117 and paragraph 2 of Schedule 25 to Finance Act 2014 extends the freeze on the nil-rate band until the end of 2017 to 2018.

Proposed revisions

Legislation will be introduced in Summer Finance Bill 2015 to provide for an additional main residence nil-rate band for an estate if the deceased’s interest in a residential property, which has been their residence at some point and is included in their estate, is left to one or more direct descendants on death.

The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band. The maximum amount will be phased in so that it is:

• £100,000 for 2017 to 2018
• £125,000 for 2018 to 2019
• £150,000 for 2019 to 2020
• £175,000 for 2020 to 2021

It will then increase in line with CPI for subsequent years.

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there’s more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, won’t qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.

The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020 to 2021.

In addition, legislation in Finance Bill 2016 will provide that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available won’t exceed the maximum available residence nil-rate band. The technical details of how the additional nil-rate band will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.

Summary of impacts

Exchequer impact (£m)	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
	Nil	Nil	-270	-630	-790	-940
	These figures are set out in Table 2.1 of Summer Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015.
Economic impact	This measure could marginally increase demand for housing but it isn't expected to have a significant impact on either house prices or rent levels due to the small overall proportion of the housing market affected and the offsetting impact of wider budget measures. The main behavioural response is the proportion of estates with a residence being left to direct descendants may be expected to increase as people change their wills over time so that their estates can benefit from the main residence nil-rate band to a greater extent.
Impact on individuals, households and families	This measure will reduce the burden of IHT for families by making it easier to pass on the family home to direct descendants for all but the largest estates.
Equalities impacts	The government has no evidence to suggest that the measure will have any significant adverse equalities impacts. Those in same-sex relationships may be less likely to have direct descendants, although children will also include adopted and foster children. HM Revenue and Customs (HMRC) doesn't hold data on the protected characteristics of all those potentially affected.
Impact on business including civil society organisations	This measure is expected to have a negligible impact on businesses and civil society organisations. It may lead to a small additional burden for personal representatives to confirm that a residence meets the qualifying criteria. There will be a negligible one-off cost to advisers as they familiarise themselves with the measure and advise on changes that individuals may wish to make to their wills in response to the policy.
Operational impact (£m) (HMRC or other)	HMRC will need to make changes to IT systems to deliver changes to the proposals relating to the main residence nil-rate band, the costs of which are currently being finalised.
Other impacts	Small and micro business assessment: this measure is expected to have a negligible impact on around 25,000 small, medium and micro businesses. 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.

More information

You can find more detailed information about this change in the residence nil-rate band guide. If you have any further questions, please contact the IHT and probate helpline.