More than two months after it was announced in the summer Budget, HM Revenue and Customs has clarified how the new residence nil-rate band will work in practice.
In the summer Budget it was announced an extra residence nil-rate amount will be introduced for deaths on or after 6 April 2017.
This will be phased in over a period of four years so that for deaths in 2017 to 2018 the maximum additional amount will be set at £100,000, increasing to £125,000 for 2018 to 2019, £150,000 for 2019 to 2020 and to £175,000 for 2020 to 2021.
The residence nil-rate band will be indexed in line with the consumer price index from 2021 to 2022 onwards.
HMRC has stated the residence must have been lived in by the deceased “at some stage”, but it does not have to have been their main residence.
The residence nil-rate band only applies to the estate on death, so it is not taken into account when calculating the tax payable on any failed potentially exempt transfers or other lifetime transfers.
Those hoping for clarity on what will happen if a person has moved to a smaller abode will have to continue to wait.
There will be a technical consultation in the autumn about how residence nil-rate band should work when a person has downsized or ceased to own a residence after 8 July 2015.
As part of this measure the nil-rate band is to remain frozen at £325,000 until April 2021.
Adviser view
Belinda Watson, a partner at Wiltshire-based Wilsons, said: “Efforts to reduce the burden of IHT on taxpayers are to be welcomed, but the proposals [in the Summer Budget] were far from unalloyed good news and add unnecessary complexity to the system. It would be better and fairer simply to raise the nil-rate band for all estates.”
