Inheritance Tax Planning: Residence Nil Rate Band
The ‘new’ inheritance relief, known as the “residence nil rate band,” was first introduced by the Conservative Government back in 2015.
What is it?
The Residence Nil Rate Band (“RNRB”) is an additional inheritance tax ‘free’ allowance that can be claimed, on top of the existing standard nil rate band allowance, in circumstances where you leave your family home to direct descendants on death.
How does an estate qualify?
Broadly speaking, an estate will qualify for the RNRB if:
- The deceased dies on or after 6th April 2017; and
- They leave their family home (or a share in one) so that it is included as part of their estate on death; and
- The property is being inherited by direct descendants; and
- The total value of the deceased’s estate does not exceed £2 million.
How does it work?
As you may have already concluded from the brief introduction above, the rules relating to the RNRB are complex and convoluted and there are many anomalies.
For instance, if you no longer own your home or have an interest in a property at the time of your death, this does not automatically disqualify your estate from benefitting from the relief. Provisions more commonly known as ‘downsizing’ allow the RNRB to still be claimed in such circumstances if the deceased ceases to own a property which would otherwise have met the requirements of the RNRB on or after 8th July 2015. This can be useful where, for example, the deceased may have moved into a care home but still owns their home. So long as the deceased lived in the property at some point during the period of ownership, potentially this would still qualify for the RNRB.
The definition of “direct descendants” also needs to be explored further as this not only includes children, grandchildren and remoter issue (as one would expect) but also step- children, adopted children and foster children.
The RNRB works in the same way as the standard inheritance tax nil rate band allowance in the sense that it can be transferred between spouses if it is not fully used on the first death. This also applies in a case where the first spouse dies prior to 6th April 2017. In this scenario, it would be deemed that the first spouse could not have used their RNRB (as the relief would not have existed at that time) and therefore potentially 100% of the first spouses’ RNRB is available for transfer. This would be off set against the value of the second spouse’s estate provided that the value of the first estate did not exceed £2 million.
Where you can off set the standard nil rate band against lifetime gifts, this does not apply to the RNRB. If you are, therefore, contemplating gifting your residence, either in part or completely, careful consideration should be given to the impact of losing the RNRB in conjunction with the total value of your estate. This is where inheritance tax planning comes in.
In addition, if the total value of your estate exceeds the £2 million threshold, the RNRB is reduced at a rate of £1 for every £2 over the threshold. Careful planning, therefore, needs to be given to your Will if you find that you are in this situation. There could be ways of reducing the size of the estate thereby preserving the relief. Careful consideration also needs to be given to the way in which your Will is drafted in these circumstances.
The RNRB has allowed more scope for creative tax planning by considering ways of reducing the size of the estate and by making lifetime gifts to preserve the RNRB. Married couples, for example, may decide to leave assets away from the surviving spouse thereby preventing the aggregated estate on the second death exceeding the £2 million threshold. Consideration can also be given to the use of nil rate band discretionary trusts, which was used frequently for inheritance tax planning purposes before the concept of the transferable nil rate band was introduced in 2008.
If your Will makes provision for a discretionary trust already, you should consider reviewing your Will to ensure it is still compliant from an inheritance tax perspective. You may need to consider altering the terms of your Will in order to ensure that your estate still qualifies for the RNRB as ordinarily the RNRB cannot be claimed where property is left under the terms of a discretionary trust.
If you would like to discuss the impact of the RNRB on your estate in conjunction with inheritance tax planning generally and your Will, please do get in touch with one of our expert lawyers.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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