The Main Residence Nil Rate Band – what lies ahead?

IHT House imageThe Conservative Manifesto provided:-

“And we will take the family home out of tax for all but the richest by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person. This will be paid for by reducing the tax relief on pension contributions for people earning more than £150,000.”

Some clues as to how this might operate are to be found in Treasury documents from 2014 leaked and accessed by The Guardian. It would seem that the Treasury brief was based on a decision by the Prime Minister and the Chancellor that simply increasing the Nil Rate Band from £325,000 to £500,000 would be too much of a drain on the public finances, so the task was to devise a measure targeted on relieving those in “modest houses” from some or all of the burden of IHT.

Meeting the cost

The Treasury Document included a suggestion that the cost of introducing the Main Residence Nil Rate Band would be met by a tapered withdrawal of the Nil Rate Band, the transferable Nil Rate Band and the Main Residence Nil Rate Band (i.e. all Nil Rate Bands) for estates over £2m, effected by £1 withdrawal for every £2 over £2m. That would have introduced a marginal IHT rate of 60% for estates above £2m within the taper.

That suggestion was replaced in the Manifesto by a proposed reduction of tax relief on pension contributions, but it seems clear from the Manifesto that those with estates over £2m will not get the full benefit of the Main Residence Nil Rate Band. The wealthy should also heed that the Treasury has already devised the logistics of tapering/removing Nil Rate Bands which could easily be extended to what might be described as the “basic” Nil Rate Band of £325,000.

Will you qualify for the Main Residence Nil Rate Band?

Based on what is in the Treasury Document, the “detailed” design of the Main Residence Nil Rate Band could be as follows:-

  • Main residence will be defined (as closely as possible) as any property that qualifies or could have qualified for Principal Private Residence relief for Capital Gains Tax at any point during the period of ownership of the deceased
  •  It will be a new Nil Rate Band, rather than an exemption or relief
  • It will apply to a main residence only if it is bequeathed to the direct descendants of the deceased (including stepchildren and adopted children) but NOT to other close family members
  • It will apply in some circumstances where a residence has not be passed to a descendant directly e.g. where it passes to a liferent Trust
  • It will be a transferable amount between married couples and civil partners only, with the unused proportion of the Main Residence Nil Rate Band being passed to the surviving spouse or civil partner (Including If the first spouse or civil partner has died before the introduction of the Main Residence Nil Rate Band)
  • It will apply to transfers of only one residence, and on death only, and the amount of the Main Residence Nil Rate Band will be the net value of the main residence after any liabilities, such as an outstanding mortgage, have been deducted
  • The value of the main residence nil rate band will not be indexed with inflation

These provisions would give rise to many uncertainties. It is clearly intended that investment properties be excluded, but someone living in a nursing home who has retained their Principal Private Residence will qualify. What if the resident has let out the property to generate income to fund nursing home fees? The use of “bequeathed” is interesting, but will the Main Residence Nil Rate Band apply if the property simply passes to qualifying descendants on intestacy? In relation to Trusts, while a liferent Trust should not give rise to problems, what about properties already in Discretionary Trusts or future Wills where the entire estate including a main residence are bequeathed to a Discretionary Trust?

Hard cases

There is recognition in the Treasury Document that narrowly drawn criteria will give rise to unfairness in the broad sense. For example:-

  • an elderly parent, brother or sister who lives with the house owner would not benefit and may be forced to leave the residence in the event that the owner dies and executors have to sell the property to pay inheritance tax;
  • a person who dies with no direct descendants will not be able to benefit;
  •  people who have sold their homes because they need to go into care or so that they can live with relatives who can care for them would not be able to benefit;
  •  people who rent rather than own their home will not be able to benefit;


It is to be hoped that by the time of the next Budget the public finances will improve to the extent that this complex and potentially unfair and divisive proposal can be replaced by the simple and straightforward option of increasing the Nil Rate Band to £500,000.