The residential nil rate band applies where:

• A person dies on or after 6 April 2017
• Their estate includes a qualifying residential interest (QRI); and
• The QRI was closely inherited.

A QRI is usually the main dwelling house owned upon death, and closely inherited means children (including any adopted or foster child or step-child) or other descendants. This definition excludes nieces and nephews.

Currently upon death if a person leaves their entire estate to a spouse or civil partner and has made no potentially exempt transfers to others in the preceding seven years, then they also transfer their inheritance tax allowance (currently £325,000 after which assets are taxed at 40% except on transfer between spouses) to them. A person will also be able to transfer their residential nil rate band in the same way.

By 2020 the additional tax-free allowance will be £175,000 per person. This means that, in a common situation where a person dies and leaves their estate to their spouse or civil partner, and upon the spouse’s death the estate including a family home worth at least £350,000 is left to their mutual children, an allowance of £1,000,000 may be available – (£325,000 + £175,000) x 2.

It should be noted that before 2007, in order to ensure the inheritance tax allowance was not lost when the first spouse or civil partner died, “Nil Rate Band Discretionary Trusts” were common in wills. Where such a trust remains in a will, the property is not deemed ‘closely inherited’ as it does not pass directly to children, so the allowance is lost. If you have a will that contains one of these trusts, or if you have any questions about the impact of the changes in inheritance tax law, we recommend that you contact the wills, trusts and probate team for a consultation.