Understanding the Residence Nil Rate Band
Pass on more of your wealth to your family tax free
About the Residence Nil Rate Band
The new residence nil rate band (RNRB), introduced from April 2017 will be set at £100,000 increasing by £25,000 each year until it reaches £175,000 in April 2020.
Coupled with the standard IHT nil rate band, the RNRB will potentially allow individuals to pass on a total of £500,000 before IHT. Provided the necessary conditions for the RNRB are satisfied, a married couple or those in a civil partnership will, therefore, be able to leave £1m free of IHT between them.
The new residence nil rate band does come with conditions, however.
Qualifying residential interest
The RNRB is available only to those who held a ‘qualifying residential interest’ immediately before their death.
The RNRB cannot be offset against other properties owned by the deceased.
Any individuals who do not own their home will be unable to utilise the RNRB as they will not have a qualifying residential interest (although a compensatory ‘additional’ RNRB may be available in some cases – for example where the deceased ‘downsized’).
It will also affect those that have released equity from their property. Calculations will be on net value.
Descendants
In order to pass on a qualifying residential interest and use the RNRB, the property needs to be ‘closely inherited’.
This means that the property must either be passed to lineal descendants such as children or grandchildren (this includes adopted children, step-children, fostered children and those under the special guardianship as defined by the Children Act 1989); or to a spouse or surviving civil partner of a lineal descendant who has not remarried by the time of the property owner’s death.
Transferring unused allowance
Similar to the standard IHT nil rate band, any unused RNRB can be transferred between spouses and civil partners when the second of them dies.
Where the first death occurs before April 2017, an unused RNRB of £100,000 will be deemed to be available for carry forward when the surviving spouse or civil partner subsequently dies. This is the case regardless of whether or not the first to die owned a qualifying residential interest.
Large estates
There is a ‘taper threshold’ for large estates which from April 2017 will be set at £2m.
In determining whether the £2m threshold is breached it is necessary to ignore reliefs and exemptions. This is an important provision as it means, for example, that one ignores business property relief and agricultural property relief, even though they are taken into account to calculate the liability to IHT.
Where an individual leaves an estate in excess of £2m, the RNRB that can apply to their estate is reduced by £1 for every £2 the estate is over this threshold.
Currently, the RNRB relief disappears for estate over about £2.7m
Planning Opportunities
There are steps you can and should be taking to ensure your estate qualifies for the Residence Nil Rate Band:
Review your will – make sure how it’s structured will allow your executors to claim the relief.
For most people, if you leave your estate to your spouse on your death, then the joint estate to your children on second death, your wills may be optimal already.
If your joint estate is valued at between £2 million and £3 million there are estate planning options available to you which could bring the value of your estate below £2m and hence ensure you qualify for the relief.
If you downsize to a smaller property in later life, you can still claim the full RNRB relief, but you must retain the completion statement.
Similarly, if you move into a care home, as long as you’ve owned a property at some point, you can still claim the relief. You must have the paperwork on file.
It’s important to consider planning for both the first and second death.
Planning can still be done after the first or second spouse dies by means of a deed of variation. This varies the terms of the will to take advantage of the tax relief available but can be more complex than planning in advance.
If you have trusts set up to receive the benefits of your estate, check that you will still qualify for the relief – leaving some or all of your estate to a Discretionary Trust for example manes it probably won’t qualify for the RNRB relief.
Keep all paperwork relating to the purchase or sale of properties and gifting of any assets.
Keep all the documents together relating to the death of the first spouse – the executor of the estate on second death will thank you!
As always with complex legislation, seek advice from a trained solicitor or tax adviser.
You can also listen to episode 18 of The Retirement Café podcast featuring Chartered Tax Adviser, Kurt Lee oft Lester Aldridge solicitors. Click here to listen on iTunes or find out more here.