“Residence Nil rate Band – Traps to Avoid”
In 2017 a new allowance for inheritance tax (IHT) was announced; the Residence Nil Rate Band (RNRB). It will eventually enable some estates to claim the £1M allowance for IHT which was promised over ten years ago. However, it is an allowance which can be easily lost if you are not aware of how it operates.
In this article I am going to explain how it works and the traps to avoid to make sure that you do not lose this valuable allowance. We’ll start with the basics first and a recap on the Nil Rate Band (NRB).
We each have an allowance for IHT i.e. the NRB. This currently stands at £325,000 and means that the first £325,000 of your estate will pass to your beneficiaries free of IHT. In the event of the NRB not being used on your death, say it passes to your spouse* free of IHT, then on the death of your spouse their estate can claim not only its own NRB but also the one belonging to your own estate thereby producing an allowance of £650,000 before IHT becomes payable.
The RNRB makes available a further allowance for IHT when a residence is ‘closely inherited’ for deaths occurring on or after 6 April 2017. The allowance will increase over the coming tax years. It currently stands at £125,000 and rises to £175,000 for deaths occurring on or after 6 April 2020.
As with the NRB, if the RNRB is not used on the first death then it can be claimed on the second death meaning that by the time we reach the 2020/21 tax year it will be possible for some estates to claim an allowance of £1M before IHT is payable.
In order for a property to be a residence it must have been the deceased’s residence for some period during its ownership. It need not be the main residence so a holiday home would qualify. It need not be in the UK but must be subject to UK tax.
So where a property is solely owned by one spouse and left to the other on death, if the survivor is already in a care home they will not have occupied the residence during their ownership so on the survivor’s death only the RNRB from the first estate will be available.
I see this is an area where some will inadvertently lose the RNRB.
In this context closely inherited means the property is passing to a lineal descendant, their spouse or a spouse of a lineal descendant who has already died (unless that spouse has remarried). The definition of lineal descendant includes step children but in order for children to be step children there must be a marriage/civil partnership between the parent and the step parent. Simply being treated as a child or step child will not be sufficient.
Leaving a residence in certain types of trust will be treated as being inherited for the purpose of RNRB. Immediate post death interest trusts such as a life interest will qualify as will a disabled person trusts and a bereaved minor trust. Discretionary trusts will not qualify even if all beneficiaries are lineal descendants.
A bereaved minor trust is where a parent leaves their estate to a child to be held on trust until they reach an age not exceeding 25. The RNRB will be lost if a later age is specified.
Additionally, a grandparent cannot create a bereaved minor trust so if a grandparent leaves a residence to grandchildren “upon them attaining the age of 18” (or by specifying any later age) the RNRB will be lost if the grandchildren are below that age at the time of the grandparent’s death. If the grandparent does not specify an age in the will then the estate will qualify for the RNRB as being closely inherited even if the grandchild is under 18 at the time of the grandparent’s death.
The availability of the RNRB starts to taper away for estates exceeding £2M. The value of the estate is calculated after the deduction of any liabilities such as mortgages but before any reliefs or exemptions are applied. For example, if you own a business which qualifies for business property relief or have investments which qualify for this relief the value of the investment or business is still included in the value of your estate to determine the extent to which your estate will be able to claim RNRB.
RNRB is reduced by £1 for every £2 that your estate exceeds £2M meaning that estates exceeding £2.3M will not qualify for RNRB. The taper threshold will increase by the rate of the CPI after 2020/21.
For estates exceeding the taper, a death bed gift to reduce your estate to below the threshold will enable RNRB to be claimed as there is no need to survive 7 years from the date of the gift for the purpose of this relief.
Deaths Pre 6 April 2017
For spouses dying prior to this date, whilst RNRB would not have been in existence at this time, so long as the other factors are satisfied, the surviving spouse’s estate will be able to claim the transferable RNRB in addition to its own RNRB.
The RNRB is a valuable allowance. In the current tax year the IHT saving could be as much as £100,000. However, it can be easily lost unless you are aware of the intricacies of the rules. As always, planning and good advice are key.
*the term spouse includes civil partners for the purpose of this article
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