Inheritance Tax Law – The Residence Nil Rate Band
Proposed changes in the law mean you could save as much £140,000 in Inheritance Tax (IHT) when the family home passes to children on death.
The new IHT Residence Nil Rate Band (RNRB) will be introduced in April 2017. It is in addition to an individual’s own nil rate band of £325,000 and conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren).
By 2020/21 families could avoid IHT on up to £1m of their wealth, as each parent will have a nil rate band of £325,000 plus a RNRB of up to £175,000.
The RNRB will be phased in over 4 years and the full £175,000 allowance will not be available until April 2020. The allowance will start at £100,000 and will increase by £25,000 each tax year until 2020.
The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or lineal descendants on death. However, the rules have been extended to accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.
The RNRB will be transferable between spouses and civil partners on death, much like the standard nil rate band. It is the unused percentage from the estate of the first to die which can be claimed on the second death. This is irrespective of when the first death occurred or whether they owned residential property at their death. There will always be an additional 100% RNRB unless the first spouse’s estate was greater than £2m.
Some people may not see any benefit from the extra nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2m. This will mean that on its introduction there will be no RNRB available if the deceased holds assets of more than £2.2m. This will rise to assets of £2.35M in 2021/22 when the full £175K allowance is available.
Reliefs such as Business Property Relief and Agricultural Property Relief will be ignored when calculating the value of the estate.
The RNRB may be lost where, for example, the property is placed into a Discretionary Will Trust for the benefit of the children or grandchildren. However, some trusts for the benefit for children and grandchildren will not result in a loss of the allowance. If the trust gives a child or grandchild an absolute interest or interest in possession in the home the RNRB can still be claimed.
The family home does not need to be owned at death to qualify. This is of help to those who may have downsized or sold their property to move into residential care or a relative’s home. The RNRB will still be available provided that:
- The property disposed of was owned by the individual and it would have qualified for the RNRB had the individual retained it.
- The replacement property and/or assets form part of the estate and pass to descendants.
Downsizing or the disposal of the property has to take place after 8 July 2015. But there is no time limit on the period between the disposal and when death occurs.
Only one residential property will qualify. It will be down to the personal representatives to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.
The basic IHT nil rate band will be frozen at £325,000 until the end of 2020/21 tax year. When combined with the full RNRB of £175,000 in 2020/21 this would provide a married couple with a nil rate band of £1m.
You may miss out on the additional nil rate band if you do not ensure that your estate is shared in the most efficient way.
Many people will hold the family home as joint tenants. On the first death this means the house passes to the surviving owner with no IHT because of the spouse exemption. The RNRB is not used on the first death, with the surviving spouse inheriting the full unused allowance. But if the combined estate on the second death is greater than £2m then both RNRBs could be lost due to tapering.
Switching property ownership into tenants in common will allow each spouse to control how the property passes on death, and potentially preserve their entitlements to the RNRB by keeping each partner’s assets below £2m. On the first death, the deceased could use their RNRB by leaving part of their share in the family home to their children. In turn, this would reduce the value of the survivor’s net estate. This could be further reduced if the deceased also gives more away up to their basic nil rate band of £325,000. So, in total, the survivor’s estate could be reduced by up to £500,000.
It makes sense to keep Wills under constant review to cater for changing circumstances. That also includes ensuring legislative change does not adversely impact upon what the deceased would have wanted.
Missing out on the RNRB, by passing the family home into a Discretionary Trust for example, could see their executors paying as much as an extra £140,000 in Inheritance Tax.
As you can see Inheritance Tax Planning remains as complicated as ever and we encourage you to discuss this with one of our team of experts at Trethowans in order to pass as much as you can to your chosen beneficiaries and as little as possible to HMRC.