The new Inheritance Tax Residence Nil Rate Band could save you as much as £140,000 when the family home passes to children on death
A new Inheritance Tax Residence Nil Rate Band (RNRB) will be introduced in April 2017. The RNRB is in addition to an individual’s own Nil Rate Band (NRB) of £325,000, or £650,000 for married couples and civil partners, and is conditional on the main residence being passed to direct descendants (e.g. children, grandchildren).
How much is the RNRB?
The RNRB will start at £100,000 for deaths after 6 April 2017 and will increase each year by £25,000 up to £175,000 for 2020/21. These are the maximum amounts. The available allowance will be reduced if the value of the property is less than this.
For example, a father dies in 2020/21 and his Will gives his 50% share in the family home to his children. If his share was valued at £150,000, the balance of £25,000 will go unused, but could be transferred to his widow.
When can the RNRB be transferred?
The Residence Nil Rate Band can be transferred between spouses and civil partners on death, very much like the standard NRB. It is the unused percentage from the estate of the first to die which can be claimed on the second death.
This can still be claimed irrespective of when the first death occurred or if they did not own a main residence at their death.
What is a residence?
A residence is a dwelling which has been the deceased’s residence at some time during his period of ownership.
A property that the deceased owned but never lived in, such as a buy-to-let property, won’t be eligible for the RNRB.
The £2 million catch
The rules are designed to help the average family pay less tax as a result of house price increases.
Estates that exceed £2million will see the Residence Nil Rate Band reduced by £1 for every £2 that the estate is valued over £2million.
When an estate exceeds £2.7million, the RNRB is lost altogether.
What if I sell my residence before I die?
The RNRB will be available when a person downsizes or ceases to own a home on or after 8 July 2015. The RNRB will still be available if:-
• The property disposed of was owned by the individual and it would have qualified for the RNRB had the individual kept it
• The replacement property and/or assets form part of the estate and pass to descendants.
What if the family residence passes into a Trust in my Will?
The RNRB could be lost where, the property is placed into a Discretionary Will Trust for the benefit of children and grandchildren.
A typical settlement wording, “to such of my grandchildren as reach 21”, will not qualify as this would create a Relevant Property Trust.
Trusts that give children or grandchildren an absolute interest or an interest in possession in the residence do qualify for the RNRB.
How is £140,000 saved?
Currently, on an estate worth £1million, £650,000 can be passed tax free (for married couples), and the remaining £350,000 is taxed at 40%, resulting in a tax bill of £140,000.
If the double RNRB can be claimed in 2020/21 (£350,000), and the NRB (£650,000), there is no tax to pay.
Review your Will
It is important to review your Will (or make a Will if you haven’t already done so) to ensure that you maximise the tax saving effect of the Residence Nil Rate Band. The conditions for claiming the RNRB are complicated but our expert lawyers will be able to assist you in making full use of the opportunity open to you.
Call us for further details on 0333 888 0404