How to pass unused main residence nil-rate band between spouses and partners

Transfer your unused main residence nil-rate band

What is the main residence nil-rate band?

  • No estate worth £325,000 or less is currently required to pay any inheritance tax (IHT). This £325,000 threshold is known as the nil-rate band.
  • However, the nil-rate band has been frozen at £325,000 since 2009, with no current plans to review this policy until at least 2019.
  • According to data from the Land Registry, the average UK house price has increased by 33.5% between August 2009 and August 2016 alone, pushing a rising number of estates over the nil-rate band.
  • Responding to the increasing proportion of estates being subject to IHT due to rising house prices, the government introduced a new nil-rate band which will come into force in the 2017/18 tax year. This is known as the main residence nil-rate band (MRNRB).
  • For IHT purposes, the main residence nil-rate band is specifically to cut the IHT bills of those looking to pass on a family home to direct descendants (currently children and grandchildren) by boosting the size an estate containing a family home can be before IHT must be paid.
 

How much is the main residence nil-rate band?

When the main-residence nil-rate band is introduced in 2017/18, it will be worth £100,000 per person. Just as you can pass your unused nil-rate band between spouses, married couples and civil partners can also transfer their unused main-residence nil-rate band to each other free of IHT.

From 2017/2018, the estates of married couples and civil partners can be worth up to an extra £200,000 before IHT is due, providing they own a home and are planning to pass it to their direct descendants.

By 2020/21, the new main residence nil-rate band will be worth £175,000 per person, or £350,000 for married couples and civil partners.

The new main residence nil-rate band

2016/17

£100,000

2018/19

£125,000

2019/20

£150,000

2020/21

£175,000

2021/22

Rises with CPI inflation

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How do I transfer my main residence nil-rate band to my husband/wife?

As with most matters of estate and inheritance tax planning, this is best done with a will drawn up by an expert that clearly states your wishes. Dying without a will in place is referred to as dying ‘intestate’ and the distribution of your estate is then dictated by the laws of intestacy.

If you pass away without leaving a will, you lose control of how you want your estate distributed after your death.

With one of the cornerstones of IHT estate planning being carefully managed distribution to make full use of various allowances, losing this control complicates the process and could increase your IHT bill.

Neil Adams
Pension and Investment Specialist at Drewberry

The laws of intestacy are devolved to the administrations of Scotland and Northern Ireland, although the rules in Wales are governed by Westminster. This means the rules of intestacy are different depending on whether the deceased lived in England and Wales, Scotland or Northern Ireland.

To take England and Wales as an example, if the estate is worth more than £250,000 and the deceased was married with children, the spouse is only entitled to the first £250,000. The remainder of the estate is split in half, with the spouse receiving half and the other half being split equally between any children (or put into a trust for any children under 18).

Assuming a couple have children and one of them passes away in the 2017/18 tax year, making full use of the deceased spouse’s transferable nil-rate band (£325,000) and main residence nil-rate band (£100,000) would require a transfer to the surviving spouse of £425,000. This is more than is permitted under the rules of intestacy.

spouses Nigel and Margaret reduced their inheritance tax bill by passing on their unused main residence nil-rate allowance

Nigel and Margaret’s story: Passing on the main residence nil-rate band

Married couple’s main residence nil-rate band transfer cuts IHT bill

Nigel and Margaret had been happily married for 45 years when, in the summer of 2020, Nigel passed away.

On the date of his death, Nigel and Margaret’s family home was worth £600,000. They want to leave the home to their three grownup children. While Nigel could choose to leave his half of the property – worth £300,000 – to the children, he opts instead to protect the couple’s IHT allowance by leaving his whole estate to Margaret.

This means that Margaret inherits not only 100% of Nigel’s main residence nil-rate band, but also his standard nil-rate band.

Making allowances

If we assume that Margaret dies 10 years later in 2030 and that, by then, the family’s home is now worth £750,000.

At the time of her death, Margaret’s main residence nil-rate band will be worth the £175,000 it reached in the 2020/21 tax year, plus a decade’s worth of CPI increases between then and her death in 2030.

The below calculations are based on assumptions of CPI inflation at 2.7% per year over the ten years to 2030, which is the average rate of CPI between 1988 and 2015. They also assume the nil-rate band remains frozen at its current level of £325,000.

Assessing Margaret’s home for IHT in 2030 after she’s used her spouse’s MRNRB

Value of home

£750,000

Less Margaret’s MRNRB

£175,000 + £53,427*

Less Nigel’s MRNRB

£175,000 + £53,427*

Total MRNRB

£456,854

Value of home outside MRNRB

£293,146

Less Margaret’s nil-rate band

£325,000

Less Nigel’s nil-rate band

£325,000

Value of unused nil-rate bands

£356,854

*for illustration purposes only, assuming ten years of CPI inflation at 2.7% per year
 

More to play with: reducing Inheritance Tax bills

Although the main residence nil-rate band is not sufficient to cover the total value of the home, the couple’s combined standard nil-rate bands more than compensate for the remaining equity in the property.

As such, not only does Margaret have no IHT to pay on her home, but her estate can also be worth an additional £356,854 before it would be liable to IHT thanks to her inheriting 100% of both Nigel’s main residence nil-rate band and standard nil-rate band.

Inheriting these allowances means that, in total, Margaret’s estate can be worth more than £1.1m before she would have to pay any IHT.

Houses freed from IHT with the main residence nil-rate bandWithout the main residence nil-rate band, Margaret would face an inheritance tax bill of £40,000 on the family home. This is because her home was worth £750,000 when she died, £100,000 more than the combination of her and Nigel’s standard nil-rate bands (£325,000 + £325,000 = £650,000). IHT would then be levied at 40% on this £100,000.

Moreover, as the family home had more than eaten up their combined standard nil-rate bands, Margaret’s estate would also have to pay IHT on any other assets she had, such as cash savings.

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Written by:
Stephen Moore
Head of Content at Drewberry

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