What the Residence Nil Rate Band means for you
From 6 April 2017 a new Residence Nil Rate Band (RNRB) is available meaning that the first £100,000 of a residence’s value (rising by £25,000 every year to £175,000 by 2020) is exempt from inheritance tax if the property passes to a qualifying beneficiary.
Qualifying beneficiaries include children and grandchildren as well as their spouses or civil partners.
For many, the RNRB will reduce inheritance tax if the family home is left to qualifying beneficiaries , but there are a number of conditions to qualify for the RNRB. Some may therefore see no benefit at all and others may need to revise their Wills to receive the benefit.
Claiming the RNRB
The RNRB can be claimed if all of the following apply:
- You die on or after 6 April 2017; and
- You leave an estate valued at less than £2million (to be increased in line with inflation from 2021); and
- You leave your home to qualifying beneficiaries
If you leave an estate worth more than £2million, a taper is applied reducing the RNRB by £1 for every £2 that your estate is valued over £2million. The effect of this (in 2017) is that the RNRB is reduced to nil for an estate worth £2.2million or more.
Any unused portion of the RNRB can be transferred to a surviving spouse (provided they leave their property interest to a qualifying beneficiary). This is available even if the first spouse died before 6 April 2017, as long as the surviving spouse dies after 6 April 2017.
In order to qualify for the RNRB, the property in which you have an interest must have been your residence at some point.
What does the RNRB mean for you?
The RNRB will result in many people paying less or no inheritance tax. For example, for the tax year 2017-2018, a married couple making use of the full transferable nil rate band and RNRB will be able to pass £850,000 free of inheritance tax (provided they meet the conditions) as opposed to £650,000. This will rise to £1 million by 2020-2021.
There has been much debate in the lead up to the introduction of the RNRB, with the effect that many people are concerned that their Wills are now inefficient for tax purposes. This is particularly the case where Wills establish trusts on death.
For most trusts, if a qualifying beneficiary is the principal beneficiary, the RNRB can be applied to the property passing into the trust.
However, the RNRB is not available for pure discretionary trusts (including nil rate band discretionary trusts (NRBDT)) because qualifying beneficiaries are not inheriting outright. In the words of Corporal Jones – DON’T PANIC! There is no need to make any immediate changes. There may still be advantages to including a NRBDT in your Will and, in the event that your NRBDT is not needed, with suitable documentation the trust can be brought to an end within 2 years of the date of death with no inheritance tax consequences.
If you downsize to a smaller, less valuable home and your estate would not qualify for the full amount of the RNRB, the unused RNRB allowance may be available if:
- You downsized on or after 8 July 2015; and
- Your former home would have qualified for the RNRB if it had been owned at the date of your death; and
- Part of your estate is inherited by qualifying beneficiaries
The amount of relief available will generally be equal to the amount of the RNRB that has been lost but it will also depend on the value of the assets you leave to qualifying beneficiaries.
The RNRB is also available if you no longer live in a property (if for example you move into a nursing home), as long as at some point you lived in a property.
What can you do to make the most of the RNRB?
Given the complexities of the legislation, it is advisable to review your Will and seek advice to ensure that your family receive the full benefit of the RNRB where possible. This is particularly important where you have, or are considering:
- Leaving some of your estate to anyone other than qualifying beneficiaries
- Leaving your estate to qualifying beneficiaries subject to an age contingency g. to grandchildren so long as they reach 25
- Placing all or part of your estate into a discretionary trust which includes qualifying beneficiaries as beneficiaries
Any tax planning is likely to focus on keeping the value of your taxable estate below the £2million threshold where possible and minimising the amount of the estate that is aggregated in the hands of a surviving spouse.
What you need to know
The first £100,000 of a residence’s value is exempt from inheritance tax if it is inherited by a qualifying beneficiary
Is there anything you need to do to claim the RNRB?
For many people, their estate will automatically be able to claim the benefit of the RNRB. However:
- if your estate is worth more than £2million; or
- you are leaving your estate to anyone other than a qualifying beneficiary, or contingent on a qualifying beneficiary obtaining a certain age; or
- are placing your estate into trust
you should seek advice from a legal professional.