Residential Nil Rate Band
Potentially, £1m Inheritance Tax allowance
Tax treatment varies according to individual circumstances and is subject to change
Residential Nil Rate Band – The Fundamentals
The Government announced in July 2015 that an enhanced Inheritance Tax (IHT) Nil Rate Band would be introduced with effect from April 2017 and so fulfil a long standing Blue Party pledge to grant a £1m Inheritance Tax allowance.
The increased nil rate band will be available when your home passes to direct descendants on death. The enhancement is known as the Residential Nil Rate Band (RNRB).
From April 2017 you will receive an additional IHT allowance of the value of your part of your home up to the RNRB at the time of death.
The RNRB or more commonly known Family Home Allowance, will be phased in as follows:
The RNRB will then increase in line with the Consumer Prices Index (CPI) from 2021/22.
Where a married couple leave their assets to each other, the existing rules allowing the standard Nil Rate Band to be transferred to a surviving spouse will also allow the RNRB to be transferred. Widows and widowers whose spouse died before 2015, will still be able to claim and transfer their spouse’s RNRB.
The RNRB and ability to transfer a spouse’s NRBs can allow the last survivor of a couple to potentially gift (upon death) up to £1m free of IHT.
Tapering of the RNRB
The RNRB will not be made available to everybody, as it will be tapered if your overall wealth exceeds £2m at the time of death. For every £2 of wealth above the £2m threshold you will lose £1 of the RNRB.
Effectively, this means that in 2017/18 an individual would lose all £100,000 of available RNRB if their overall wealth exceeded £2.2m. If all of their assets were passed to a spouse, then the couple would lose £200,000 of available RNRB if the estate exceeded £2.4m on the second death.
As this is calculated using the value of the estate before reliefs such as Business Property Relief it will mean owners of some exempt assets may find that they do not qualify for the RNRB if the holding is valuable, even the assets themselves are not subject to IHT.
The taper threshold of £2m is scheduled to rise in line with CPI from 2021/22.
Although this is not an exhaustive list of conditions, the following bullet points are the relevant conditions that we see being considered:-
- The estate must include a residential property or qualify for relief under the below Downsizing Rules
- The individual or surviving spouse dies after 5 April 2017
- Only one residential property will qualify, but personal representatives and executors will be able to select which property if there is more than one in an estate
- A property that was never the residential of the deceased (such as a buy-to-let property) will not qualify
- The property must be left to a direct descendant, being a child (including a step-child, adopted child or foster child) of the deceased and their descendants
- Property left in trust will not qualify unless the only beneficiaries are direct descendants and the trust deed gives said descendants at least a life interest.
Implications of the Conditions
If you have a late spouse from before the RNRB rules were declared then you will be able to claim a RNRB on their behalf.
Other relatives, such as Brothers, Sisters, Nieces and Nephews can’t benefit from the RNRB, even if you have no direct descendants to whom to give your property.
Property passed to a discretionary trust via a Will does not benefit from the RNRB.
There was a concern that the RNRB would discourage people living in valuable houses from downsizing or from moving into care, as it could reduce their total available NRB.
To prevent this problem relief is still available where a qualifying residential is sold before death.
There are several additional conditions that must be met in order to qualify for the RNRB in this situation, as follows:
- The property is sold in the period after 7 July 2015, but before death
- The property must have been eligible for the RNRB had it been retained
- A less valuable property or other assets of an equivalent value are passed from the estate to direct descendants.
The relief will cover both downsizing to a less valuable property and an outright sale without acquiring a new property.
Downsizing can cover a part disposal of property and there can be more than one downsize between 7 July 2015 and death.
Where a property has been given away, assets of an equivalent value to the property at the date of the gift must be left to direct descendants.
The calculation of partial relief where downsizing has taken place is based upon the proportion of the RNRB that would have been available at the time of downsizing, provided the other conditions are satisfied. For example, if an unmarried individual sells their property in 2017/18 and at that time the property was worth £85,000 (I.e. 85% of the £100,000 RNRB), their estate will benefit from 85% of the RNRB in the year of death provided that sufficient assets are passed to direct descendants.
Residential Nil Rate Band for IHT Planning (in Practice)
The RNRB is now an essential aspect of your IHT planning. In particular, for marginal estates that breach the tapering level, managing the estate to maximise RNRB is possible and worthwhile.
The rules are such that there is usually not a great deal you can do to maximise RNRB, but individual situations can offer some unique opportunities that should be discussed and utilised.
The interaction with trusts, old style Nil Rate Band Wills and IHT qualifying investments offer IHT savings in a number of cases and potentially with very little effort and expense.
This is an area that will need consultation – some examples are:
- With large estates it may be worthwhile moving a home to tenants in common and passing half of the home to descendants on the first death rather than have both RNRBs tapered away on the second death.
- If you have the older style Nil Rate Band Wills that utilise a trust on the first death, then you may lose half of your available RNRB. Rewriting your Wills could save IHT.
- With BPR qualifying, AIM shares or EIS investments, if you have a tapered RNRB, it may be worth investing to a trust based IHT efficient investment instead as it may reduce your estate allowing you to utilise the full RNRBs.