Synopsis: Latest thoughts on the proposal to create a £175k “nil rate band” for the main residence.

Prior to the election there were rumours in the press that the Conservatives were considering proposing an additional ‘main residence nil rate band.’ While there was nothing in the Budget, it did make the Conservative manifesto.

Understandably, there is precious little detail currently, but from what we know an additional ‘main residence nil rate band’ of £175,000 will be available in addition to the existing (‘any assets’) inheritance tax nil rate band of £325,000 in circumstances where a family home or other main residence is transferred to a direct descendant of the deceased (presumably including step children and adopted children). Depending on the circumstances this could mean that the overall inheritance tax threshold would be increased to a total of £1million for married couples and civil partners – i.e. £500,000 each. It is, however proposed, that the ‘main residence nil rate band’ would be reduced by £1 for every £2 where the value of the property exceeds £2m.

The cost of the additional nil rate band will, it seems, be funded by gradually reducing the annual allowance for those earning over £150,000 per year. It is proposed that the allowance would reduce by £1 for every £2 of income over £150,000 until it reaches a “floor” of £10,000 at £210,000 of taxable income.

The additional ‘main residence nil rate band’ is expected to only apply to transfers on death and would be transferable between married couples and civil partners to the extent that it is not used on first death. Note that the ‘main residence nil rate band’ of £175,000 (or £350,000 for married couples) would not be available to use in relation to assets other than the family or main home, nor would it be available where the home is left to other family members (i.e. those who are not direct descendants of the deceased).

Therefore in order to benefit from a ‘main residence nil rate band’ the property in question must qualify as the individual’s only or main home. One would expect that this would have the same meaning as the principle private residence for the purposes of capital gains tax (CGT). It will be interesting also to see if, where two properties are owned, an election of the main residence can be made for IHT as well as for CGT purposes.


Example of how the new ‘main residence nil rate band’ could work: Brenda and Bill are married and have total assets valued in the region of £850,000. Their family home is worth £300,000 and is owned jointly. At the time of Bill’s death his interest in the property passes to Brenda under the survivorship rules. She also inherits all of his other assets meaning there is no IHT to pay on Bill’s death as the spouse exemption would apply.

On Brenda’s death, she leaves all of her assets to her son Jack. Her personal representatives would have two years in which to make a claim for any unused nil rate band on Bill’s death.

The value of the main residence had increased to £350,000 and the value of the other assets to £650,000 primarily due to an unexpected inheritance. Assuming the nil rate band remains at £325,000 an the main residence nil rate band at £175,000, they could make a claim for £325,000 which was unused on Bill’s death plus (on the basis that it would be transferable in the same way) £175,000 of the ‘main residence nil rate band’ as the family home passed to Jack. This would mean making a total claim of £500,000.

Brenda’s personal representatives would also have her own nil rate band of £325,000 available and £175,000 of the ‘main residence nil rate band’ to set against her death estate.

This would mean there would be £350,000 ‘main residence nil rate band’ available to set against the property and £650,000 available to set against other assets in the death estate.

This would mean that there would be no IHT to pay on Brenda’s death as the entire estate would be taxed at the nil rate.

Interestingly the press estimated that the measures would reduce the number of estates liable to inheritance tax to 6.2% of total deaths by the end of the next Parliament (contrasted with just over 10% if the proposals were not adopted).

At present it is difficult to comment on whether or not this proposal will go ahead and if so what the detail will be. There has been some negative comment around the economic impact of this relief – as well as dismay at the proposed reduction of the annual allowance.

As for any tax incentive linked to a specific asset class there is every possibility that it (the tax incentive) could encourage greater investment in relation to the main residence and subject to the need to drive an income from any capital used, some may be encouraged to ‘up-size’ on tax grounds. Either way, obtaining an up to date valuation of the main residence will inevitably prove to be useful prior to making any decisions.

While this is only at proposal stage it will nonetheless be interesting to see how this evolves. Further details may be announced in the second Budget which is on 8 July, and legislation may follow in the second Finance Bill. Many will be waiting with interest.

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