The Residence Nil Rate Band

“Life is really simple, but we insist on making it complicated.” Confucius

The new Residence Nil Rate Band (“RNRB”) came into effect on 6th April 2017. At first blush, this appears to be a relatively simple concept to understand in that it intends to increase the overall nil rate band allowance of someone who has passed away when they own a property. However, as with many things in life, the devil is in the detail and it is not quite that simple once it is looked at in more depth.

Why is it so complicated?

The Conservative party originally pledged to increase the ordinary Inheritance Tax nil rate band (“NRB”) of married couples to £1 million by 2020. However, this suggestion was later thought to be too expensive for the government to implement and it was therefore watered down with many caveats so it can apply to homes where the value of an estate is below £2 million. Inevitably, this has brought about quite a few tricky rules being put in place.

What is the RNRB?

HM Revenue and Customs refer to it as the “additional threshold amount”. Each individual already has a NRB (not to be confused with the RNRB) of £325,000 when they die (which can be reduced as a consequence of lifetime gifting).

The RNRB applies on death and cannot be used against lifetime gifts or those made in the last 7 years of someone’s life. It effectively allows an additional “nil rated” (ie, no tax charged) amount on part of someone’s estate where they own a home when they die and have left this onto descendants.

How much is it worth?

At the time of writing (December 2017) the RNRB is £100,000. It will rise by £25,000 in April 2018 to £125,000, again in April 2019 to £150,000 and then in April 2020 to £175,000. After this time it will rise in line with the Consumer Price Index.

What are the main criteria for the RNRB to apply to an estate?

The main criteria are as follows:

  • The home must have belonged to the person that died and they have to have lived there at some stage.
  • If there is more than one home owned by the person that died, the personal representatives can elect which home the RNRB should apply to.
  • The value of the home will be the market value less any mortgages, etc. If someone owned a property or a share in a property worth less than the RNRB then it will be the lower value that will apply.
  • The home must be left to direct descendants. This includes children, grandchildren (or their spouses even if widowed), stepchildren, adopted children and foster children. Relatives not included are siblings, nephews, nieces, etc.

Is the RNRB transferrable?

Yes, as with the ordinary NRB, the RNRB can be transferred to a surviving spouse’s estate. Therefore if a husband died and left his estate to his wife (regardless of when) his RNRB would be unused (by the gift of the estate being subject to the spouse exemption) and could be claimed by the wife’s personal representatives on her death.

What if my estate is worth more than £2 million?

The RNRB is tapered away by £1 for every £2 an estate is worth in excess of £2 million. An example would be where an estate is worth £2.1 million then the RNRB would be exceeded by £100,000. Therefore the RNRB of £100,000 would be reduced by £50,000.

As such, if an estate is worth more than £2.2 million and the RNRB was £100,000, it would be tapered all the way down to nil.

Downsizing

Matters become quite complicated when taking into account the effect of someone who has downsized property or do not own any property at their death. I will not go into these here as they are beyond the scope of this article.

Legal advice

As ever, it is a good idea to take legal advice on how these rules can apply to your own situation and how they fit into your own estate planning matters.

If you would like to discuss any of the above issues then please feel free to contact me or one of my colleagues from our Private Client team on 01245 504904.

Clive is the head of our Private Client Team. He provides expert advice on probate, wills and Inheritance Tax matters, employing the use of Wills and trusts where necessary to achieve the most favourable outcome for clients.

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