What you need to know about the new residence nil-rate band
The residence nil-rate band (RNRB) provides an additional inheritance tax allowance for individuals who leave their main residence to lineal descendants. Although only applying to those who die on or after 6th April 2017, the additional nil-rate amount was introduced by the Finance Act 2015 which supplements the Inheritance Tax Act 1984.
An individual’s estate may be eligible for RNRB if it includes an interest in their property of residence and is left to direct descendants.
The additional allowance is to be brought in gradually, increasing by £25,000 on an annual basis. The amount will begin at £100,000 in 2017/18 and eventually grow to £175,000 in 2020/21.
Any unused allowance will be able to be transferred between married couples or civil partners, much like the existing nil-rate threshold of £325,000.
Interest in the property or the appointment of a property must be submitted to secure the RNRB, within two years following death.
Level of relief
For couples who pass away after the 6th April 2017, an allowance of up to £1 million may be available before any inheritance tax is due. In a straightforward estate where one spouse leaves everything to the other and then to the children following their death, they will collectively be entitled to two nil-rate bands of £325,000, as well as two RNRBs of £175,000 by 2020. In total, this amounts to an allowance of £1 million.
Spouses or civil partners who have died at any time before 6th April 2017 will have their unused allowance automatically transferred to the surviving spouse.
Larger estates are subject to some reductions. For those which amount to over £2 million – the “taper threshold” – the level of RNRB will be lowered at a rate of £1 for each £2 above the £2 million threshold.
The property must be inherited by lineal descendants. Although there is an absence of exact definition where lineal descendants are concerned, the term generally encompasses children, grandchildren as well as step children, adopted children and foster children. Children who were also under the guardianship of the deceased may also be included. Where an estate is left to spouses or civil partners of those referred to above, it will also qualify for RNRB.
For the purpose of RNRB, ‘inherited’ refers to gifts by will, that which is a result of intestacy as well as any jointly owned assets which pass to the surviving owner. Where a gift is made into certain types of trusts – discretionary for example – the RNRB will not apply. This is regardless of whether the beneficiaries are lineal descendants.
Where more than one property is owned and all have been places of residence, the executors must decide which home upon death is to benefit from the RNRB.
The RNRB may also be available for individuals who have gifted their home to lineal descendants during their lifetime. They must still benefit from the property prior to death, whether that be continuing to live there alone or with their children.
Similarly, a mechanism is in place for those who have downsized as well as those who are no longer the owners of a property post 8th July 2015. Where a portion of RNRB has been lost due to downsizing to a residence of lower value, that part may still be eligible for relief. To qualify, the smaller property or assets of an equivalent value must have been left to direct descendants.
Even if the owned property is not actually the place of residence upon death, the RNRB is still likely to apply if during ownership at some point it had been the place of residence. This may be the case for example, where the individual moves into a care home.
Although RNRB still applies to that left under intestacy law, the creation of a will is likely to increase the level of clarity over estate proceeds, as well as ensuring they pass to who the deceased intended.
Even if a will has been made, clients may be advised to review their will. This is to ensure that if they are eligible for RNRB on their estate, executors are able to benefit from it following death.