After considerable public pressure and discussion, last year’s budget introduced a Residence Nil Rate Band (RNRB), which is designed to reduce inheritance tax for a large number of families. The RNRB works in addition to the personal nil rate band and is intended to make it less costly to pass property down through the family.
What is the current situation?
The personal nil rate band allowance is currently £325,000 and where a net estate is worth more than that then the inheritance tax rate of 40% is applied on the amount over and above the allowance.
How will the RNRB change things?
The RNRB is designed to apply on top of the personal nil rate band, starting from the 2017/2018 tax year. The RNRB increases each year, beginning at £100,000 and growing by £25,000 each year until 2020/21 when it will be £175,000. The RNRB will be applicable to an interest in residential property, which has been a person’s main residence, where it is left to direct descendants such as children and grandchildren.
How does it work in practice?
The way that the RNRB applies depends a lot on when someone passes away. For example, with someone who dies in the 2017/18 tax year who gifts 75% of their home to direct descendants via their will, descendants are able to deduct £100,000 from that 75% share when the estate is being calculated for the purposes of inheritance tax.
What if RNRB is more than the value of the property?
Again, this will depend on which year someone passes away and the level of RNRB in that year. For example, if the applicable year is 2020/21 then the RNRB will be at £175,000. If a third of the property is left to the children and that share is worth £160,000 then this would leave a £15,000 portion of the RNRB unused.
Is it possible to transfer RNRB?
In certain circumstances yes – for example, using the above example where there is £15,000 of RNRB unused because the property share is worth less than the RNRB in that year, this could be transferred to the estate of a surviving spouse on their death.
Does the RNRB apply at any other time?
Yes, RNRB is also available in a situation where you are downsizing or you stop owning your main residence, for example if you are selling a property because you are moving into care. The idea is to make sure that people are not prevented from accessing the benefits of RNRB if transferring property before death. Careful records of any sale during lifetime need to be kept in order to claim the RNRB following death.
How to make the most of the RNRB
Take another look at your will – or create one if you don’t have one – and make sure you are leaving the property, or a share of it to direct descendants (children can be natural, adopted or step children).
Review how you own your home and whether it is worth altering this – if you own as joint tenants then you won’t benefit from the RNRB straight away as the home will pass directly to the other joint owner before anyone else.
Do some estate planning – if your home is currently due to be left into certain types of trust then you may not be able to benefit from RNRB. Discuss this with an expert.
Is it worth factoring in the RNRB?
Yes, for estates worth between £650,000 and £2.35 million, particularly where you are married on in a civil partnership, it really is worth it. With some careful planning you could benefit by £1m of inheritance tax allowances by 2020/21.
To discuss your personal circumstances with a specialist Solicitor call 01756 799 000.