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Inheritance Tax – new main residence transferable nil-rate band


In recent years, property prices have risen far more quickly than the Inheritance Tax (IHT) nil-rate band. As a result the number of estates subject to IHT has been increasing rapidly.  This is contrary to the aim of the current government that only the wealthiest estates should be subject to IHT. The measures announced in the Summer Budget were widely publicised beforehand and formed part of the Conservative Party manifesto. It was commonly reported that the new measure would give an effective IHT allowance of £1 million, although we can see that the full allowance of £1 million is not scheduled to come into force until 2020/21.

Detail of the proposals

From April 2017 there will be a new main residence transferable nil-rate band which will apply when a main residence is passed on to a direct descendant. Broadly this means a child or grandchild and includes adopted children, foster children and step-children. It does not include nieces and nephews.  The definition of ‘main residence’ will generally be obvious but will be very similar as the definition currently applicable to principal private residence relief for capital gains tax. A property which was never a residence of the deceased such as a buy-to-let property would not qualify. The allowance will initially be set at £100,000 in 2017/18, increasing to £125,000 in 2018/19, £150,000 in 2019/20 and up to £175,000 in 2020/21.  This new main residence transferable nil-rate band will work alongside the existing IHT nil-rate band which is currently £325,000. In the same way as with the current nil-rate band, any unused main residence transferable nil-rate band will be transferred to a surviving spouse or civil partner. It is possible therefore that by 2020/21 an individual will have their own nil-rate band of £325,000 as well as a main residence transferable nil-rate band of £175,000 in respect of their main residence plus a nil-rate band of £325,000 inherited from their spouse and a main residence transferable nil-rate band of £175,000 inherited from their spouse.  This gives the much advertised total of £1 million. It is worth noting that the current nil-rate band of £325,000 is now set to remain until 2020/21.


There are measures in place to make sure the new proposals do not discourage individuals from downsizing. These measures will only apply to someone who ceases to own their main residence on or after 8 July 2015. Initially it looks like this would only apply in a very limited number of circumstances. The example given in the Treasury policy paper is that if someone downsized from a house worth £200,000 to a home worth £100,000 they could still benefit from the maximum allowance of £175,000 in 2020/21 if they leave the home and £75,000 of other assets to direct descendants. Where we could see the rules having more practical relevance is where someone has sold their main residence and moved into a nursing home.  In these circumstances, they would be able to leave assets worth up to £175,000 (by 2020/21) to a direct descendant.

Tapered withdrawal of main residence relief for estates worth more than £2 million

It was also announced in the Summer Budget that there would be a tapered withdrawal of the main residence transferable nil-rate band for estates worth more than £2 million.  We are yet to see much detail on this point but will update further when more information emerges.



Date: 8th July, 2015
Author: Daniel Bisby


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