Monday, 12 June 2017
The Residence Nil Rate Band (RNRB) for Inheritance Tax (IHT) came into force on 6 April 2017 heralding the biggest change in IHT in nearly a decade. Here’s what you need to know:-
It is an additional allowance for IHT which will apply to deaths which occur after 6 April 2017.
In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren, or step-children). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2million. It only applies on death and not on gifts or any other lifetime transfers.
It starts at £100,000 for 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. These figures are per person, so a couple may benefit from double the allowance. Taking into account the nil rate band (currently £650,000 for a couple) then by 2020/21 families could escape IHT on up to £1 million of their wealth.
The RNRB value is limited to the lower of the value of the property left to direct descendants or the total RNRB available. The RNRB is applied to the estate first and then the nil rate band (currently £325,000) is applied. If the value of the property is less than the RNRB the balance cannot be offset against other assets in the estate.
Like the nil rate band for IHT, the RNRB can be transferred between spouses if it is not used in whole or part when the first spouse died even if the first death occurred before 6 April 2017.
The RNRB is still available if you have downsized, given away or sold your home:- this is known as the downsizing addition. For downsizing addition to apply, you must have downsized to a less valuable home or ceased to own a home after 8 July 2015. Your former home would also need to have qualified for the RNRB if you had retained it and at least some of your estate must be left to your direct descendants. Calculating the downsizing addition is complicated but it is generally the amount of the RNRB that has been lost because your former home is no longer in your estate.
Only one residential property will qualify. It will be down to your Executors to nominate which residential property should qualify if there is more than one in the estate. A property which was never the residence of the deceased, such as buy-to-lets, cannot be nominated.
The RNRB may be lost if you do not own a property at your death or if your direct descendants do not inherit on death. This means the RNRB can be lost if your property is left to some form of trust, for example discretionary trusts or trusts for grandchildren where they cannot inherit until a specified age such as 21. If the property is held in a trust prior to death, the RNRB will only apply if the death causes the property to pass to direct descendants, for example if a spouse has a right to live in the property during their lifetime (known as a liferent trust) and on their death it passes outright to their children.
The RNRB can also be lost in whole or part if your estate exceeds £2 million. This is especially important if you are a couple and individually your estates are less than £2 million but combined exceed this amount.
The RNRB will not be lost if a property is not specifically mentioned in a Will as long as it forms part of the estate on death. It also will not be lost if the property is sold during the estate administration.
We recommend that you review the arrangements you have made for your death to ensure your estate will be able to maximise the RNRB available. Missing out on the RNRB, for example by passing the family home into a discretionary trust, could result in your estate paying as much as an extra £140,000 in IHT.
If you would like any assistance with reviewing your Will or estate planning then please contact one of our expert team on 01383 721141.