In 2017 Main Residence Relief came into being. Many people are still confused about how the relief works in pratice and the rules can be complicated.
As a starting point it is worth remembering who currently pays Inheritance tax (IHT). In the 2019/20 tax year, everyone is allowed to leave an estate valued at up to £325,000 without their beneficiaries paying IHT. The amount is set by the Government and is called the nil-rate band threshold.
Above the nil-rate band, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your estate to a charity), if your estate does not qualify for the tranferable nil rate band and/or the main residence relief.
So if you leave assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in IHT - if you're not leaving anything to charity, a spouse or a civil partner.
The £325,000 limit has been frozen until at least 2020/21, although main residence relief is now in place.
The IHT regime is therefore now as follows:
- The current allowance where no IHT is charged on the first £325,000 (per person) of someone's estate remains unchanged. Above the threshold, the charge is 40%.
- A new tax-free main residence relief can now be claimed. It is valid only on a main residence where the recipient of a home is a direct descendant, (classed as children, step-children and grandchildren). The current rate of relief is £150,000 per person. The rate will increase to £175,000 per person in 2020, when it will then be frozen and increase only in line with the CPI..
- In the tax year 2019/20 the maximum that can be passed IHT free is £950,000 for married couples and civil partners and £475,000 for others. For singles, this is made up of the existing £325,000, plus the “extra” £150,000 main residence relief. For couples, when the first dies their allowance is passed to the survivor, so that £475,000 is doubled to £950,000.
- In 2020, the tax-free amount will rise to £1m for couples and £500,000 for singles, made up of the existing £325,000 and the “extra” main residence relief of £175,000.
Main residence relief for IHT cannot be claimed by your executors if:
- you do not have direct descendants
- you do not have, and have never had, a main residence
- you have a main residence and direct descendants, but the gift of your estate to the same is not "immediately vesting". For instance, you leave your assets to your children, but say they have to reach a certain age before inheritng them
- Your estate is worth £2 million or more before allowing exemptions and reliefs. You will lose £1 of the main residence relief allowance for every £2 of value above £2m. So for a couple, with estates worth £2,350,000 or more there will no main residence relief at all.