The Residence Nil-Rate Band (RNRB) was introduced to wipe out or reduce the inheritance tax payable on an individual’s estate when passing their family home to their children or grandchildren. This relief is currently being phased in and the maximum annual allowance is as follows:
The above amounts are added to the current nil rate band, on which tax is paid at 0%. This currently amounts to £325,000 and has done for some time. From 2020/21, it will, therefore, be possible to pass a property worth £500,000 (£1,000,000 for a couple), to your children/grandchildren free of inheritance tax.
For most, claiming the RNRB to remove or reduce the inheritance tax payable on death should be straightforward, but for some, there will be complications. This article is intended to highlight some of those complications to assist with preparations for whenever that day should arrive.
Availability of The Residence Nil-Rate Band is dependent upon the property being ‘closely inherited’ which means that the property must be inherited by a lineal descendant, such as a child or grandchild. ‘Closely inherited’ also includes a spouse, civil partner or non-remarried widow of a lineal descendant. In addition, the term includes an adopted, step or foster child. It should, however, be noted that lineal ancestors such as parents and grandparents do not qualify.
The house may still need to be sold!
The additional RNRB is offset against the value of the total estate to arrive at the amount chargeable to inheritance tax, and so although the relief may reduce the overall tax liability, there may still be tax to pay, and it may still therefore be necessary to sell the home to settle the bill!
Relief tapered for estates worth more than £2,000,000
Where an individual’s estate is valued at more than £2,000,000, the relief is tapered away by £1 for every £2 in excess of this amount. As a result, from 2020/21, where the estate is worth in excess of £2,350,000, the relief is withdrawn completely.
A possible planning consideration is to make a series of gifts, to ensure that the value of your estate does not exceed £2,000,000, on death. Gifts of this kind are known as “potentially exempt transfers” and whilst the value of these transfers will become liable to inheritance tax if you do not survive seven years from the date of the transfer, these transfers are not taken into account for the purpose of claiming the RNRB, and could, therefore, be a useful tool to preserve this relief.
Relief still available, even if property no longer in use
The RNRB is available to those with a qualifying residential interest (QRI) who leave all or part of that interest to one or more lineal descendants. A QRI is defined as an interest in a dwelling house, including the garden and grounds of any size, which has been the individual’s residence at any point during their ownership. As the property is only required to have been the individual’s residence at some point during ownership, the relief is still available even if the property is no longer in use.
A particularly complex aspect of The Residence Nil-Rate Band is the downsizing addition. This allows an estate to benefit from the RNRB even if the individual had downsized to less valuable property or sold their property prior to death. The downsizing/sale of the former home must have occurred on or after 8 July 2015 and the former property must have qualified for the RNRB had it been kept until death. In addition, at least part of the estate must pass to lineal descendants as described above.
The downsizing addition will usually be the percentage of The Residence Nil-Rate Band that is lost when the former home is no longer part of the estate but will also depend on the value of other assets left to direct descendants. The downsizing addition can never exceed the maximum RNRB that would have been available if the downsizing or sale hadn’t happened.
Although you do not need to report the sale or downsizing to HMRC, it is important that detailed records are kept to ensure that any entitlement to additional relief can be easily identified.
There are also many complexities to be considered in respect of the availability of The Residence Nil-Rate Band in relation to trusts. Advice should be sought if you are a trustee concerned about the availability of this relief.
It is important to be aware of the potential pitfalls that may arise in respect of this complex relief and now is the time to review those wills! If you would like any assistance with this, please get in contact, we will of course be more than happy to help.