From the 6th April 2017 estates up to the value of £2 million should now benefit from the residence nil rate band (RNRB) on death. Now is the time to review your affairs to ensure your estate will qualify – it is not straight forward and advice in this area should be sought.
What is the RNRB?
Inheritance tax (IHT) is charged on the value of assets owned on death at the rate of 40%. However, the tax is only charged on value exceeding the nil rate band (currently £325,000). From 6 April 2017, the RNRB applies so that less IHT may be paid when the family home is left to children, grandchildren and some other individuals.
The terms of your Will can affect the ability to claim the RNRB. Therefore it is important to review your Will now to ensure your family can claim.
Will my estate benefit from the RNRB?
Your estate will benefit from the RNRB, in addition to the main nil rate band, if you leave your interest in the family home to direct descendants such as children or grandchildren and some other individuals such as stepchildren or foster children as well as the spouses or civil partners of any of these (“qualifying beneficiaries”). Claiming the RNRB could enable an additional £100,000 to £350,000-worth of assets to pass to the next generation without a charge to IHT.
The RNRB can be claimed if all of the following apply to you:
- You leave an estate valued at less than an upper limit, which is initially £2 million but is set to rise with inflation from 6 April 2021. The RNRB is tapered down for estates worth more than this. This limit ignores any relief from IHT. Therefore if you own farmland worth say £3million, even if it qualifies for 100% relief, the estate will be available.
- You leave your home to qualifying beneficiaries. Some trusts for these beneficiaries also qualify.
If your assets are worth more than £2 million you should review your Will and consider arranging your affairs to ensure you qualify for the RNRB.
How much is the RNRB worth?
The RNRB could be worth £40,000 per individual in 2017/18 rising to £70K each by 2020/21.
What if I sell my home?
The RNRB may still be available where you have sold your home and downsized to a less valuable property, or even if you no longer own a property, provided that you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary.
What if I move out of my home?
The RNRB will apply if you own a property that is no longer your residence when you die (for example, because you have moved into a care home), provided that it was your residence at some time during your period of ownership.
What if I have given my home to my children already?
Even if you have already given away your home to your children, if you still benefit from the property in some way without paying for it, for example, you continue to occupy it even though it has been given away, or if you are co-occupying with your children after having transferred it to them, it may still be possible to claim the RNRB on your death. However, it is still advisable to review your will.
What if my children do not want my home after I die?
It does not matter whether the qualifying beneficiaries who inherit your home want to keep it. The RNRB will still be available even if they sell your home immediately after your death.
What if I have more than one home?
If you own more than one property that is (or has previously been) your residence when you die, your executors must choose which one will benefit from the RNRB.
EXAMPLES OF COMMON SITUATIONS:
Example 1: James and Rachel want the survivor to have a life interest in their property
James and Rachel are married and jointly own their home. They have three adult children. Paul’s Will provides for Rachel to have a life interest in his half of the home after he dies and for his three children to inherit his half when Rachel dies. Rachel’s Will mirrors James’s. If James dies before Rachel his estate will not benefit from the RNRB but Rachel’s estate can bring forward his unused RNRB as well as using her own RNRB.
Example 2: Mark and Jane are not married
Mark is not married or in a civil partnership. He owns his home jointly with his partner Jane who is a widow. Jane has two adult children from her marriage. Mark cannot benefit from the RNRB because he does not have any children and has not adopted Jane’s children. Jane could benefit from the RNRB if she leaves her interest in the family home to her children. If Mark and Jane were married, Mark could use his RNRB because Jane’s children would be his stepchildren.
Example 3: John and Sarah have combined assets worth over £2 million
John and his wife Sarah jointly own a property valued at £1 million. They have four adult children. John has investments worth £1 million. Sarah also has farming assets qualifying for agricultural property relief worth £1 million. John’s Will provides for his entire estate to pass to Sarah if he dies first. Sarah’s Will mirrors John’s. John will not be able to benefit from the RNRB when he dies because his estate will pass to his wife rather than his children. If Sarah survives John and inherits his share of the property, and his investments, her estate is likely to be worth £3 million or more so that the RNRB cannot be claimed on her death. John and Sarah should seek advice to see if their Wills can be updated to avoid this “bunching” effect on the second death. For example, John and Sarah could revise their Wills so that part of the estate of the first to die is inherited by their children.
If you would like advice on the inheritance tax nil rate band please do not hesitate to get in contact