New Inheritance Relief: 'The Residence Nil Rate Band'
What is it?
The Residence Nil Rate Band (“RNRB”) is an additional allowance for the purposes of inheritance tax (“IHT”). Subject to compliance with various other rules the RNRB will help to reduce the overall IHT bill if you leave your home to your descendants.
The rise in house prices means that many people with quite modest homes, particularly in London and the South East, will be drawn into paying inheritance tax. Rather than increase the general inheritance tax nil rate band the Government decided to introduce an extra relief targeted at gifts in Wills relating to the family home. This relief is therefore a lot more complicated compared to just increasing the normal nil rate band.
The Basic Rule
An estate will be entitled to the RNRB if:
- An Individual dies on or after 6 April 2017;
- The individual owns a home or a share in the home;
- One or more descendants of the individual inherit the home;
- The value of the deceased’s estate isn’t greater than £2m
How much is the RNRB?
On deaths in the following tax years it will be:
- £100,000.00 – 2017/2018
- £125,000.00 – 2018/2019
- £150,000.00 – 2019/2020
- £175,000.00 – 2020/2021
Thereafter the RNRB is due to increase in line with inflation.
In order to qualify for the RNRB you have to leave your home to one or more of your “direct descendants”. However, for the purposes of the RNRB direct descendant is defined quite widely so that it will include:-
- Your Children, Grandchildren, Great Grandchildren etc.
- The Spouses or Civil Partners of your Children, Grandchildren or Great Grandchildren including their Widows, Widowers or surviving Civil Partners
- Your Step Children
- Your Adopted Children
- Anybody you have fostered
- Anyone for whom you have been appointed as a Guardian or Special Guardian for that child when they were under 18.
- Married Couples and Civil Partners
You may already be familiar with the concept of the transferable nil rate band. If a married person dies and leaves all of their assets to their spouse that means the deceased will not have used any part of their ordinary nil rate band, which is currently £325,000.00. When the surviving spouse dies his or her executors can claim the transferable nil rate band from the first spouse to die. This means that the survivor of a married couple will often have a double nil rate band available meaning that the first £650,000.00 of their estate is free of IHT.
The same applies to the RNRB. For example, assume that Eric died in 2014 and left all of his assets to his wife Diane. Diane dies on 3 September 2020 and her Will leaves all of her assets to her children equally. Diane owns her own home worth £400,000. When she dies. In these circumstances, Diane’s estate would qualify for an RNRB of £175,000.00 and the unused RNRB from Eric’s estate can be transferred giving a total RNRB of £350,000.00. This can be added to the normal nil rate band for Diane plus the NRB transferred from Eric to give a combined NRB and RNRB on the occasion of Diane’s death of £1m.
The value of the available RNRB cannot exceed the value of the deceased’s residence. However, in principle any married couple owning a family home worth £350,000.00 or more will have a combined NRB and RNRB of £1m where at least one of them doesn’t die until after 5 April 2020.
What happens if you don’t own your own home when you die because you sold it in your lifetime, perhaps because you had moved into a Care Home? In these circumstances, the value of the RNRB is preserved for you provided the sale or downsizing took place on or after 8 July 2015. Working out exactly how much you will be entitled to can be complicated.
Restriction on the RNRB
If your total estate on death is worth more than £2m then the RNRB is reduced by £1.00 for every £2.00 that the estate exceeds the £2m threshold.
This means that the RNRB will be of no value at all to a single person with total assets of £2,350,000. or to a married couple whose assets exceed £2.7m.
Many of the normal rules for calculating the taxable value of an estate for IHT purpose do not apply for the purpose of the £2m threshold. For example, the spouse exemption and business property relief are ignored but on the other hand, lifetime gifts are not added back. A member of the Trust & Estates Team will be happy to advise you in more detail if you are concerned that your estate may exceed the RNRB taper threshold.
It would be sensible to review your Will (or indeed make a Will!) if claiming the RNRB would be of value to you and your beneficiaries.
It is not essential that the Will contains a specific gift of the family home. “Traditional” Wills in which a married couple state that if they both die then they leave all of their assets to their children equally would be sufficient to ensure that the maximum RNRB could be claimed.
We continue to recommend Will Trusts where appropriate for reasons of flexibility and asset protection. If the family home is left in trust in your Will this does not necessarily mean that the RNRB will not be available. The Talbots Trust & Estates Team can provide further guidance.
The introduction of the RNRB means that some of the generally accepted rules for estate planning are now going to change. In particular, if you have concerns that your estate may exceed the £2m taper threshold then traditional Wills in which the first spouse to die leaves all assets to the surviving spouse outright may no longer be appropriate.
For further advice and information please contact one of Talbots’ Trust & Estates Lawyers in each of our 7 local offices.
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