What is the residence nil rate band and why do you need to know about it?

by | Jul 5, 2022

Writing a proper will is important because it makes sure that your wishes are respected when you’re no longer around. It can also help you to give more of your estate to your loved ones and less to the taxman. If you own a family home you need to know about the residence nil rate band. It’s a tax allowance that could make all the difference to the legacy you leave.

What is the residence nil rate band?

The residence nil rate band is a tax-free allowance that you can use to pay less inheritance tax. It’s available to you if you’re a homeowner and you want to leave the family home to your children or other direct descendants.

Your spouse or civil partner can still inherit the house from you. If you’re the first to go and you’ve left them your estate, including the house, they can use your allowance when they pass it on to your children. There are also other steps you can take to leave part of the house to your children but allow your partner to stay living there.

Who can I leave my house to?

The rules are that you must leave your family home to a direct descendant, which is defined as a child or grandchild. However, that doesn’t have to be a biological child. You can also leave your house to your stepchildren, adopted children and any child you’ve fostered or been a legal guardian to when they were under 18. You can also leave it to your child’s spouse or civil partner.

You don’t have to be married to your stepchild’s parent for them to inherit, although you’ll need to have been married at some point. Even if you’ve subsequently divorced the rules will still see them as your child.

When can’t I use the residence nil rate band?

The definition of a direct descendant leaves out partners who are simply living together and any wider members of your family. You can’t use it if you don’t have children. For example, if you’re an uncle who decides to leave his house to a niece or nephew, you won’t be able to use the residence nil rate band to reduce their inheritance tax bill. You also can’t use the allowance if you’re leaving it to any of your siblings as they aren’t your descendants.

Of course, that doesn’t stop you from leaving your house to anyone you choose. It just means that the residence nil rate band may not be available.

What are the tax rules?

The basic tax-free allowance for inheritance tax is £325,000 and the residence nil rate band increases that to £500,000 in total. It’ll be taken away on a tapered basis if your whole estate is worth more than £2million so if your estate is worth £2.35million or more you won’t get it at all. You can also inherit any part of the allowance that your spouse or civil partner didn’t use.

There are also different rules if your house is owned or part owned by a trust, it depends on the type of trust used. Some people put half the house into a trust to protect it for their children through their will, for example after a second marriage; this will still allow you to use the allowance. However a property owned by a life time trust is more complicated.  It’s important to get professional advice so you know what the best approach will be and what the tax implications are.

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