Inheritance Tax- The Residence Nil Rate Band (RNRB)

The 2015 Summer budget announced the introduction of the residence nil rate band for inheritance tax.  This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.  This is in addition to the standard Inheritance Tax Nil Rate Band (NRB) of £325,000 per person and is designed to give a married couple a combined IHT free amount of £1m on death from 6^th April 2020.

This will be:

• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

Of course, these are the maximum amounts. The available allowance will be reduced if the value of the property is less than this.

For example, a Betty Jones dies in 2020/21 and her will gifts her 50% share in the family home to her children.  If this share is valued at £120,000, the extra £55,000 of nil rate band will go unused (but may be transferred to her surviving spouse).

When can the RNRB be transferred?

The RNRB is transferable between spouses and civil partners on death, much like the standard NRB. It is the unused percentage of the RNRB 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 or they had used part of this band on their death.

Tapering/ withdrawal of the residence nil rate band

Individuals with large estates may not see any benefit from the extra nil rate band. The residence nil rate band will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2m.

This will mean that from its introduction there is no RNRB available if the deceased holds assets of more than £2.2m. This will rise to assets of £2.35m in 2021/22 from when the full £175,000 allowance applies.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of assets which make up the estate i.e. they are included in the value for residence nil rate band purposes.

Gifts can however reduce the value of the estate to ensure that the RNRB applies.  For example, John Smith has an estate of £2.5m and is terminally ill.  He makes the decision, several weeks before death in 2020/2021, to gift £500,001 to his son.  For IHT purposes, this gift would be classed as a failed potentially exempt transfer, as John did not survive for the requisite 7 years for this to fall outside of his estate.  However, the fact that he did not survive 7 years does not matter in respect of the RNRB.  As his estate was under £2m in value at the date of death, the RNRB would apply in full.  This means that if John Smith also had the full NRBs carried over from his late wife, they would have a combined NRB of £1m.

Therefore, by making the gift to his son, John Smith would save £140,000 in inheritance tax (£350,000 @ 40%).

In what circumstances may the RNRB not be available?

The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death.  Therefore, the property cannot pass to another family member such as a niece or nephew and still benefit from the RNRB.

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 residence nil rate band may also be lost where the property is placed into a discretionary will trust for the benefit of the children or grandchildren.

What about downsizing?

The family home doesn’t 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 must have taken place after 8 July 2015. But there is no time limit on the period between the disposal and when death occurs.

Reviewing wills

It makes sense to keep wills constantly under review to cater for changing circumstances and changing legislation.

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.

A deed of variation may come to the rescue for some where property is passed to an individual. But it could be near impossible to vary a transfer into a discretionary trust which has a wide class of beneficiaries as agreement would be needed from all possible beneficiaries.

At Fiducia we are proud to have a network of high quality professional connections, which include several solicitors who serve Colchester, Ipswich and the surrounding areas.  Should your wills require a fresh perspective, please let us know and we will be happy to refer you to one of these connections.