The new inheritance tax Residence Nil Rate Band (RNRB) will be introduced in just a few weeks.
It is on top of an individual's own nil rate band (NRB) of £325,000 and conditional on the main residence (or potentially the proceeds of sale)
being passed down to direct descendants.
The rules are very complicated but here we provide an overview for your general information.
The RNRB will be phased in from April 6th, 2017 when it will be £100,000, increasing by £25,000 each year until it reaches £175,000 in April 2020.
As with the NRB, any unused RNRB can be transferred to a surviving spouse or civil partner, so by 2020/2021 families could escape inheritance
tax on up to £1 million of their wealth (£325,000 + £175,000 = £500,000 x 2 = £1m) on the death of the surviving spouse/civil partner.
12 Points to Note
1. The RNRB applies only to transfers on death, not during lifetime
2. The property does not need to be left by Will
The RNRB will also apply on intestacy or where joint property passes by survivorship.
3. It is not necessary for the property to have been the deceased’s main residence (or his residence at the time of his death)
Instead, it is enough that it has been used as his residence at some point during his ownership.
4. The RNRB is available only in relation to one property
If the deceased had more than one residence, his personal representatives can nominate which is to benefit from the RNRB. Only one residential
property will qualify. It will be for the personal representatives to nominate which residential property should qualify if there is more than
one in the estate. A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.
5. 'Direct descendant' is defined widely
The property must be ‘closely inherited’, meaning it must be left on death to children, grandchildren, step children, adopted children (treated
as children for both the natural and adoptive parent) and foster children. It could also include the spouse or civil partner of a deceased child,
so long as they have not remarried.
6. Certain trusts for direct descendants will not qualify for the RNRB
If a property is left on trust for direct descendants, the RNRB will be available only in limited circumstances, for example where they have a
right to trust income, or the property is left on particular favoured trusts for children, or on a disabled person's trust. No RNRB will be available
for trusts outside these limited exceptions, such as discretionary trusts or trusts for grandchildren who do not receive the property outright
on the deceased's death, unless it is possible to use a deed of variation or trust appointment to 're-write' the trust terms.
7. The RNRB may also be available if the deceased was a trust beneficiary
The allowance may be available in certain circumstances where a deceased had a right to use a property held in trust and on his death someone
receives the property outright.
8. The RNRB will be tapered away for estates over £2m at the rate of £1 for every £2
As a result in 2017/2018, an estate valued in excess of £2.4m will not benefit from the RNRB at all. When the relief reaches £175,000 in 2020/2021,
the cut-off will apply to estates over £2.7m.
9. Unused RNRB may be transferred to a surviving spouse or civil partner even if the first to die never owned a residence
10. The RNRB may still be available if the individual has downsized
The family home doesn't need to be owned at death to qualify. This is of help to those who may have downsized or sold their property to move into
residential care or a relative's home. The RNRB will still be available provided:
- The property disposed of was owned by the individual and it would have qualified for the RNRB had the individual retained it;
- The replacement property and/or assets form part of the estate and pass to descendants.
Downsizing or the disposal of the property has to have taken place after 8th July, 2015. But there is no time limit on the period between the disposal
and when death occurs.
11. The RNRB will apply only to a maximum of the equity in a residence (ie value less any mortgage)
12. Review your Wills!
As your circumstances change you should review your Will. As the law changes you should also review your Will to ensure you are maximising all
Please note this article is for information only and should not be seen as constituting advice. KWW Solicitors will be happy to discuss any of the legal aspects of the RNRB but financial matters will require the advice of a professional, authorised and regulated independent financial adviser