What the Residence Nil Rate Band means for you
Inheritance tax on death is charged at 40% when a person’s estate exceeds the nil rate band (£325,000 in the tax year 2016-17). 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 also 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.
So for many, the RNRB will reduce inheritance tax if the family home is left to qualifying beneficiaries . However, there are a number of conditions to qualify for the RNRB so some will see no benefit at all and others may need to revise their Wills in order 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, you may not completely lose out on the RNRB. A taper is applied reducing the RNRB by £1 for every £2 that the 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.
It is worth noting that much like the nil rate band, any unused portion of the RNRB can be transferred to a surviving spouse. For example, if a spouse or civil partner dies leaving their whole estate to their surviving spouse, the full RNRB of the deceased is unused because they did not leave their interest in their property to a qualifying beneficiary. In these circumstances, the unused RNRB can be transferred to the surviving spouse and applied to their estate on their death (provided they leave their property interest to a qualifying beneficiary). Importantly, the transferrable RNRB 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. The RNRB is still available if you have sold your home and downsized, or even if you no longer own a property, provided you sold the property on or after 8 July 2015. The RNRB is also available if you no longer live in your property (if for example you move into a nursing home), as long as at some point you lived in the property.
What does the RNRB mean for you?
In simple terms, 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 £1million 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 the most part, this has been the result of inaccurate or incomplete reporting in the media.
The introduction of the RNRB has caused particular concern in relation to Wills that establish nil rate band discretionary trusts (NRBDT). This is because qualifying beneficiaries are not treated as inheriting outright for the purposes of claiming the RNRB. There is however no need to make an immediate change to such Wills. There may still be advantages to including a NRBDT in your Will and, in the event that your NRBDT is not needed, if suitably drafted the trust can be brought to an end within 2 years of the date of death with no inheritance tax consequences.
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. It is particularly important to seek advice where you have, or are considering, the following arrangements:
- Leaving some of your estate to anyone other than qualifying beneficiaries
- Leaving your estate to qualifying beneficiaries subject to an age contingency
- Placing all or part of your estate into a discretionary trust which includes qualifying beneficiaries as beneficiaries
If you would like any further information in relation to the contents of this article, please contact Anne Lewis, a partner in the private client team at Cripps on 01892 506 356 or at firstname.lastname@example.org