What is the Residential Nil Rate Band?
With the main Inheritance Tax (IHT) Nil Rate Band (NRB) being frozen at £325,000 since the 6th April 2009, and set to stay that way until 6th April 2021, there hasn’t been much to shout about from an IHT perspective in recent budgets. However, as part of 2015’s Summer Budget, an additional Residential Nil Rate Band (RNRB) was announced to be introduced for the 2017/18 tax year. Starting at £100,000 and increasing by £25,000 per annum it will be worth £175,000 per person by the 2020/21 tax year. This equates to a combined potential IHT NRB of £1m per couple, in real terms - a potential additional IHT saving of £140,000!
What is the Current Nil Rate Band (NRB)?
As it stands each individual has a tax free NRB of £325,000 and IHT only applies to the value of the estate on death that is above this. However, once this allowance is utilised anything in addition is taxed at a whopping 40%! A few key financial planning points to remember here are that there are some, much smaller, annual exemptions that can be utilised and gifts to charity can also have a beneficial effect on the rate of tax paid. Transfers between spouses/civil partners are exempt from IHT. This means if the entire estate is inherited by the surviving spouse the deceased’s NRB can be carried over and used on the second death. Importantly, it is the unused percentage that is available on death of second spouse and not the cash value at the time of the deceased’s death. For individuals with larger estates, where these allowances will not suffice, we would recommend taking further advice as there are a number of additional lump sum tax planning options available to suit different requirements.
Who is eligible?
It’s important to remember that as with any allowance of this size, there are some eligibility requirements:
- The RNRB applies to the main residence ONLY and is non-transferable to other assets. This means if your property is worth less than the allowance you forfeit the remainder.
- The residence MUST pass to a direct descendent, for avoidance of doubt this means children or grandchildren or the spouses of which (inclusive of step, adopted and foster children).
- The residence MUST form part of deceased’s estate on death. Lifetime gifts with reservation are eligible however property belonging to deceased but already held in trust can sometimes invalidate eligibility for the RNRB. We would advise that additional guidance is potentially needed here.
What happens if you downsize or go into residential care?
To qualify as a main residence the deceased must have lived in the property. However, downsizing relief may apply that is equal to the benefit of the RNRB, if the main residence was sold post 8th July 2015. To benefit from downsizing relief the proceeds from the sale must be traceable and left to direct descendants. This is a tricky area so worth taking additional advice if you think downsizing relief may apply.
What happens if you leave your property in trust as part of your will?
To qualify as being left to a direct descendent the beneficiary must become immediately entitled upon death of the deceased. Property transferred into a trust on death to be held until the beneficiaries reach a certain age will not always qualify therefore particular care needs to be taken when property is left to minors or vulnerable individuals. This makes it an important time to revisit your will and ensure any provisions you have made don’t mean you or your loved ones will miss out.
What happens if you don’t have a will?
If an individual dies without a will the rules of intestacy will apply, effectively the law decides who inherits the estate. Not only are these rules not always complicit with an individual’s wishes, but they can be inefficient tax wise and cause undue stress to the deceased’s loved ones. Whilst wills are often perceived as for those who are married with children, this is not the case! Those with considerable assets may find these are passed to parents rather than siblings under the laws of intestacy which can further exacerbate IHT liabilities. In order to guarantee favourable tax treatment on death, including the RNRB, a well thought out will should be the first step.
What happens if your spouse has already passed away?
Whilst the RNRB is only available to those that pass away after 6th April 2017 any unused RNRB allowance can be transferred between spouses/civil partners in the same way as the main NRB. Crucially, this applies even if the first spouse passed away prior to the introduction of the new RNRB so surviving spouses potentially have access to double the allowance from 6th April 2017.
Are you still entitled if your estate is worth £3m?
The RNRB is tapered by £1 for every £2 on estates with a net value of over £2m so once your estate reaches £2.2m there is no RNRB available. Individuals with large estates will therefore still need to look into further lump sum tax planning.
If you would like more information about Inheritance Tax and the Residential Nil Rate Band, please contact Natasha Hellewell or another member of our team on 0800 884 0006 or email firstname.lastname@example.org.