​What does the new Inheritance Tax Residence Nil Rate Band mean for you?

​What does the new Inheritance Tax Residence Nil Rate Band mean for you?

On the 6th April 2017 the new Inheritance Tax Residence Nil Rate Band ("RNRB") came into effect. It has been advertised in the media as effectively increasing the maximum Inheritance Tax threshold for married couples and civil partners to £1 million, but is this true and what exactly does it mean for you?

How does the new Residence Nil Rate Band ("RNRB") work?

Everyone is able to pass a certain amount of their estate to their beneficiaries free of inheritance tax – this is known as the nil rate band ("NRB"). The nil rate band is currently frozen at £325,000 until at least 2021.

Spouses and civil partners have the ability to claim any unused nil rate band ("NRB") from their deceased partner. Therefore, surviving spouses or civil partners potentially have an inheritance tax free allowance of £650,000 to use on their estate.

In addition to the £325,000 nil rate band ("NRB"), from the 6th April 2017, the new Inheritance Tax Residence Nil Rate Band ("RNRB") will be available if on your death you leave a residential property which you have occupied at some point to your "lineal descendants". Lineal descendants are your children and grandchildren and their spouses and civil partners and include adopted, foster and step-children. The Residence Nil Rate Band ("RNRB") can only be set against the value of the residential property.

The maximum amount that falls into the Residence Nil Rate Band ("RNRB") will initially be £100,000 but this will increase as follows:

2017/2018

£100,000

2018/2019

£125,000

2019/2020

£150,000

2020/2021

£175,000

2021/2022 onwards

The value will increase in line with the Consumer Prices Index.

The Residence Nil Rate Band ("RNRB") is transferrable between married couples in the same way as the £325,000 nil rate band (NRB). This means that if this allowance is not used on the first death, the executors of the second spouse to pass away can claim the unused allowance.

If the net value of the Estate is above £2 million, the additional Residence Nil Rate Band ("RNRB") will be reduced. This reduction applies at a rate of £1 for every £2 over £2m your estate is worth on death. Therefore, currently there is no entitlement for the new Residence Nil Rate Band ("RNRB") at all for an estate worth in excess of £2,200,000 (increasing to £2,350,000 by 2020/21).

How does this work in practice?

Paul is aged 81 and was widowed 2 years ago. His wife left all of her estate to him outright. Paul has three children and five grandchildren. He lives in a house worth £400,000 and owns a buy-to-let property that is worth £350,000. He has other savings and assets worth £150,000.

Paul's current estate is worth:

Main residence: £400,000

Buy to let property: £350,000

Savings & assets: £150,000

Total: £900,000

If Paul died in June 2017, leaving his main residence to either his children or grandchildren, he would receive an additional Residence Nil Rate Band ("RNRB") allowance of £100,000 to set against his main residence. He would also be able to claim his wife's unused Residence Nil Rate Band ("RNRB") of £100,000.

On top of this Paul would also receive the standard nil rate band (NRB) of £325,000, plus his wife's unused nil rate band (NRB) of £325,000. This combined nil rate band (NRB) totalling £650,000 would be applied to the whole of the estate.

Therefore, the calculation would be:

Value of estate: £900,000

2 × Residence Nil Rate Band ("RNRB"): (£200,000)

2 × standard nil rate band (NRB): (£650,000)

Taxable estate: £50,000

Paul estate would therefore be taxed at 40%:

Inheritance Tax @ 40%: £20,000

In this example if Paul had died after April 2020 he would have qualified for two times the higher main residence allowance of £175,000, thereby avoiding Inheritance Tax altogether.

In Paul had died before 6th April 2017 the Residence Nil Rate Band ("RNRB") would not have been available. This means his total taxable estate would have been £250,000, resulting in an inheritance tax bill of £100,000.

What if the family home has already been sold?

It may be possible to apply the Residence Nil Rate Band ("RNRB") even if the family home has been sold prior to death. This is particularly useful to those who have downsized or moved into care. Effectively, the Residence Nil Rate Band ("RNRB") will still be available if you have sold your house since 8 July 2015, or do so in the future, and you leave other assets instead to your lineal descendants in your Will.

For example, Paul sold his home for £400,000 in May 2017 and buys a smaller property for £150,000. He dies in June 2017 and leaves his house and the reminder of his estate worth £700,000 to his three children. Despite the smaller property now only being worth £150,000, Paul would still receive the combined Residence Nil Rate Band ("RNRB") of £200,000 (£100,000 of his own allowance and £100,000 of his wife's unused allowance) as this will be based on the value of his former home.

On top of this Paul would again receive the standard nil rate band (NRB) of £325,000, plus his wife's unused nil rate band (NRB) of £325,000. This would again leave a taxable estate of £50,000.

The pitfalls of the Residence Nil Rate Band ("RNRB")

There are some limitations to the Residence Nil Rate Band ("RNRB") which are important to keep in mind as they could have an impact on the contents of your Will.

  • Properties left to lineal descendants and other beneficiaries:

Only properties left to lineal descendants will attract the new Residence Nil Rate Band ("RNRB"). This means properties left to nephews, nieces, siblings and other relatives are not included. Where a property is left to beneficiaries who are a mixture of lineal descendants and other individuals, the Residence Nil Rate Band ("RNRB") allowance must be apportioned between direct descendants and others; meaning part of the allowance is lost and more inheritance tax will be paid on your estate. If you are thinking of including a mixture of lineal descendants and other individuals in your Will it is important you seek legal advice as it could affect the drafting of your Will.

  • Properties left in trust:

As the legislation requires a property to be left outright to descendants, the Residence Nil Rate Band ("RNRB") will not apply when the property has been placed into some forms of trust. However, some trusts for the benefit children and grandchildren will not result in a loss of the allowance. If the trust gives a child or grandchild an absolute interest or interest in possession in the home the Residence Nil Rate Band ("RNRB") can still be claimed. Other trusts such as Bereaved Minor Trusts, 18 - 25 Trusts and Disabled Persons' Trusts will also retain the additional Residence Nil Rate Band ("RNRB").

  • Low value properties:

If a property is worth less than the full Residence Nil Rate Band ("RNRB"), any unused Residence Nil Rate Band ("RNRB") allowance cannot be used to offset inheritance tax against other assets.

  • Multiple properties:

Only one residential property will qualify for the Residence Nil Rate Band ("RNRB") allowance. It will be down to the individuals administrating the estate to nominate which residential property the use the allowance against if there is more than one in the estate.

Will you benefit from the Residence Nil Rate Band ("RNRB")?

In summary, the Residence Nil Rate Band ("RNRB") is likely to be a considerable benefit for some people, however the rules are rather complicated and are of course dependent on whether you have any 'lineal descendants' to pass your property to. It is therefore important that you review your Will to see how you can benefit.

To find out more or discuss your individual requirements in further detail, our dedicated Wills, Trusts and Probate lawyers are available to help. Contact us today on 01603 693500 or email us using the 'Make an enquiry' form. Appointments available at our Norwich, North Walsham, Brooke and Sheringham offices.