Residence Nil Rate Band

December 13, 2016

The Residence Nil Rate Band is coming into effect from April 2017 so now is a good time to review your Will and estate planning to ensure your beneficiaries can take full advantage of the additional inheritance tax allowance which could save you up to £140,000 of inheritance tax.

Inheritance tax allowance

The current position is that everyone has an inheritance tax free allowance of £325,000 on their death (the nil rate band) and inheritance tax is paid at 40% on any value over this amount, subject to any reliefs.

From April 2017 an additional allowance will be available on top of the existing nil rate band. In certain circumstances personal representatives will be able to claim the additional amount of £100,000 for the 2017/18 tax year increasing incrementally to £175,000 on 6 April 2020, or the value of the property if this is less.

The Residence Nil Rate Band (RNRB) is the result of the government’s promise to increase the inheritance tax allowance up to £1 million. It became law on 18 November 2015 but will only apply to people who pass away on or after 6 April 2017. The result is that a couple who are married or in a civil partnership can, in certain circumstances, between them, claim £1 million inheritance tax allowance on their deaths. This isn’t quite as generous as some were hoping after the government’s initial promise but it can still have a significant effect on the amount of inheritance tax paid by an estate.

However it is not as straightforward as it might first appear and there are some tricky details to navigate. A Will should be properly considered and constructed in order to comply with the requirements and avoid the pitfalls.

Wills

Each estate is considered individually and the RNRB can only be claimed if:

  • At the date of death the deceased owns a property.
  • The property was the deceased’s residence (so buy-to-let properties will not qualify).
  • The property is inherited by the deceased’s direct descendants.

The following points should be noted as common situations that are affected by these restrictions.

Firstly, spouses are not descendants but as anything they inherit attracts spouse exemption it is not detrimental, however unmarried partners are also not recognised so anything passing to them will be taxed and no RNRB will be available. This is also the case with the children of unmarried partners unless the relationship between the deceased and the child is officially recorded. Siblings and nieces and nephews are also not included in the list of possible beneficiaries.

The property must be inherited by the beneficiary and not put into a trust. To put this in context, people often have Wills leaving their estate to their children and then grandchildren delaying the age of inheritance to 25 years old. Under the new rules this estate may not attract the RNRB. The RNRB also cannot be claimed if the estate is left in a discretionary trust. As always, there are a few exceptions to this rule.

Lifetime planning

If at the date of death the estate is worth more than £2 million the RNRB available will be tapered by £1 for every £2 over that value. This means that for the 2017/18 tax year any estate valued at over £2.2 million will not be able to claim any RNRB and by the 2020/21 tax year any estate valued at over £2.35 million will not be able to claim any RNRB.

For this reason it is important to consider making gifts during your lifetime and also who inherits your estate in your Will. How and when lifetime gifts are made will have an impact on claiming the RNRB.

To encourage people not to hold onto large properties simply to maximise the available allowance there are also provisions in place for people who downsize their main residence after 8 July 2015. So at their death they may own a smaller property or none at all as long as the assets held as a result of the sale of the property are inherited by descendants.

Conclusion

The various provisos and requirements attached to the RNRB make it more complicated than it appears but it is still a beneficial tool in reducing inheritance tax if properly utilised and for this reason it is worth considering tax planning to exploit its full potential.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions take in respect of this article.

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