Main inheritance tax residence explained as care home exemption leaves even Martin Lewis confused

Inheritance tax has several breaks that many people make the most of, as only four per cent of households pay the 40 per cent tax bill, but one unique case has left finance guru Martin Lewis scrambling. In the latest episode of Not The Martin Lewis Podcast, the titular star assembled a panel of inheritance and will experts to talk through a series of questions from fans about inheritance tax.

Martin read the question: “If a home has to be sold to pay care home tax, can you still get the residential nil rate band? The property would be left to the children and the spousal allowance was not used either, so it would be £1m, reduced to £650,000 if the house had to be sold to pay the tax.”

Individuals can pass £1 million tax-free if they use both their own and their spouse’s allowance and pass on their main residence to their descendants. This forms the zero residence band. Chartered tax adviser Carrie Bellan said that in this case the person would still get the £1m relief even if the main residence was sold to pay the care home charges.

However, she pointed out: “Provided the wealth is still in the estate. So in that example if there was £1m of wealth but care home costs eroded it to £650,000 then yes the nil residence band can be used but it would mean that part from the zero tariff band is not used. So there would be no estate tax to pay, but the allowances are not fully maximised.”

Confused by Carrie’s response, Martin stammered over his BBC podcast and pleaded: “You’re going to have to explain that a bit more because I’m not sure I got it.” Carrie obliged, explaining that a property meeting the nil rate bracket would be well below the threshold after being “knocked down” by care home costs.

She continued: “It will come in at less than £1 million, so it still falls within your allowances for inheritance tax payable, but it would mean you haven’t used the full allowances you could. “

Martin rephrased it too, to check that he now really understood; “So there’s just more money you could have given him? So if we have an example, a property worth £1.5 million. If the house was sold for the care home (taxes) you could always leave £1 million if it’s a spouse who does. Would only the surplus be taxed extra?” To which Carrie eagerly agreed.