Understanding the Residential Nil Rate Band and what it means for you
It was announced in the Summer Budget of 2015 of the intention to provide additional relief from inheritance tax to individuals who wish to leave their homes to their children.
However, rather than simply raising the inheritance tax threshold from its current rate of £325,000, the concept of the ‘residence nil-rate band’ (‘RNRB’) was introduced.
What is the RNRB?
Currently, when anyone dies, the first £325,000 of their estate is free from inheritance tax. This is the nil-rate band (‘NRB’). The NRB can be reduced if certain gifts have been made in the seven years prior to death.
From 6 April 2017, an additional nil rate band will be introduced, known as the residence nil rate band, which will exempt the first £100,000 of a home’s value from inheritance tax, on the basis that it passes to a ‘direct descendant’ (this threshold will rise £25k every year to £175,000 by 2020/21). The NRB can then be applied to the balance of the value of the property and/or other assets in the estate.
For example: Mr Brown dies on 6 April 2017. He is divorced and leaves his estate to his children. His estate comprises his home, worth £350,000 and cash assets, worth £75,000. His executors can claim the RNRB against the first £100,000 of his home, bringing the value of his combined estate down to £325,000. The full NRB can then be deducted, meaning that no inheritance tax is due.
The legislation incorporates ‘downsizing provisions’ so that where a residence is sold or no longer owned (i.e. to pay for care) after 8 July 2015, the RNRB will still be available.
Are there any exclusions?
1. The property must have been the residence of the deceased at some point and must form part of their estate at death. Buy-to-let properties will not benefit and if an individual has more than one home, only one can attract the RNRB.
2. RNRB relief is reserved to those who leave their home to their ‘direct descendants.’ For RNRB purposes, a direct descendant includes:
A child, grandchild or other lineal descendant. A step-child, an adopted child, or a child who was fostered at any time by that person. A spouse or civil partner of a lineal descendant.
3. For estates that exceed £2million (even if the actual property is worth much less than this), the RNRB will be reduced by £1 for every £2 that the estate is valued over £2million.
It is worth noting that, if a party to a marriage or civil partnership dies, passing their estate to their partner, then inheritance tax does not apply due to the spouse exemption (as long as the surviving spouse is domiciled in the UK). However, the unused RNRB can be transferred to the surviving partner to be applied to their estate on their death. This is irrespective of when the first of the couple died, as long as the surviving partner dies after 5 April 2017.
For example: Mrs Brown dies on 7 June 2017 leaving her estate to her children. Her husband died in 2015 leaving his share of the estate to her, meaning no inheritance tax was due. Her estate comprises her home, worth £700,000 and cash assets worth £250,000. The executors will be able to deduct Mrs Brown’s RNRB (£100,000) and NRB (£325,000), as well as the unused RNRB and NRB of her spouse. This means that the 40% inheritance tax is only due on the remaining £100,000 of the estate.
What does this mean for me?
Given the complexity of the legislation, to benefit from this new relief it is essential that you revisit your Will to ensure that it is drafted in such a way that allows the relief to be claimed.
People with the following arrangements should certainly have them reviewed:
- If you own your home as tenants in common and intend to place the share of the first to die in a discretionary trust;
- If your Wills have left the estate of the first to die on life interest trusts to the survivor and/or include discretionary trusts for the children/grandchildren on the second death;
- If you leave property to anybody other than your direct descendants.