The Residence Nil Rate Band and what it means for you
From 6th April, a new inheritance tax (IHT) relief has come into force that could save the children of a married couple up to £80,000 in IHT, rising to £140,000 by 2020/2021.
Unfortunately, rather than simply raising the inheritance tax threshold from its current rate of £325,000, which would have been easy to understand, the ‘residence nil-rate band’ (‘RNRB’) was introduced.
What is the RNRB?
When anyone dies, the first £325,000 of their estate is free from inheritance tax. This is the nil-rate band (‘NRB’) that was already in force. The NRB can be reduced by certain gifts made in the seven years prior to death.
From 6 April, the first £100,000 of a home’s value is also exempt from inheritance tax, on the basis that it passes to a ‘direct descendant’ (this threshold will rise by £25,000 every year to £175,000 by 2020/21). The NRB can then be applied to the balance of the value of the property and/or other assets in the estate.
For example: Mr X dies on 6 April 2017. He is divorced and leaves his estate to his daughter. His estate comprises his home, worth £350,000 and cash assets, worth £75,000. His executors can claim the RNRB against the first £100,000 of his home, bringing the value of his combined estate down to £325,000. The full NRB can then be deducted, meaning that no inheritance tax is due.
The legislation incorporates ‘downsizing provisions’ so that where a residence is sold (i.e. to pay for care) after 8 July 2015, the RNRB is still available (as long as certain other conditions apply).
Are there any exclusions?
- The property must have been the residence of the deceased at some point, so buy-to-let properties will not benefit. If an individual has more than one home, only one can attract the RNRB
- This relief is reserved for those who leave their home to their ‘direct descendants’ (although this is widely defined to include children, grandchildren, step-children, adopted children, foster children and the spouses of all of these people)
- For estates that exceed £2million (even if the actual property is worth much less than this), the RNRB is reduced by £1 for every £2 that the estate is valued over £2million.
It is worth noting that, if a party to a marriage or civil partnership dies, passing their estate to their partner, then inheritance tax does not apply due to the spouse exemption (as long as the surviving spouse is domiciled in the UK). However, the unused RNRB can be transferred to the surviving partner to be applied to their estate on their death. This is irrespective of when the first of the couple died, as long as the surviving partner dies after 5 April this year.
For example: Mrs X died on 7 April 2017 leaving her estate to her daughter. Her husband died in 2015 leaving his share of the estate to her, meaning no inheritance tax was due. Her estate comprises her home, worth £700,000 and cash assets worth £250,000. The executors will be able to deduct both Mrs X’s RNRB (£100,000) and NRB (£325,000), as well as the unused RNRB and NRB of her spouse. This means that IHT is only due on the remaining £100,000 of the estate.
What does this mean for me?
Given the complexity of the legislation, to benefit from this new relief it is essential that you revisit your will to ensure that it is drafted in such a way that allows the relief to be claimed. People with the following arrangements should certainly have them reviewed:
- If you own your home as tenants in common and intend to place the share of the first to die in a discretionary trust
- If your wills have left the estate of the first to die on life interest trusts to the survivor and/or include discretionary trusts for the children/grandchildren on the second death
- If you leave any part of your estate to your grandchildren subject to an age contingency
- If you leave property to anybody other than your direct descendants.
Though growth in the housing market is expected to slow over the next two years whilst Brexit negotiations take place, growth is still expected to be around 5% per year for the next 3 years (rising to 6% by 2020). Therefore, if your estate is worth close to £2m now, lifetime planning (the possibility of making gifts to reduce the value of the estate) will be more important than ever.
For more information please contact Eleanor Gadd, Associate, Private Client.
Written: 20 May 2016
Updated: 15 May 2017
Published: 15 May 2017