Inheritance Tax And The Residence Nil Rate Band (2024)

It's a complicated piece of legislation ...

POSTED BY HELEN BEAUMONT ON 20/10/2017 @ 8:00AM

The Residence Nil Rate Band (RNRB) has been with us now for just over 6 months. This blog post looks at a couple of the many pitfalls with this complicated legislation ...

The Residence Nil Rate Band is a complicated piece of legislation!

To refresh, the RNRB was introduced to allow individuals to pass on the family home on death, potentially free of Inheritance Tax. It is in addition to the standard Nil Rate Band, currently £325,000, and is being phased in as follows:

2017/18 - £100,000
2018/19 - £125,000
2019/20 - £150,000
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2020/21 - £175,000

The RNRB is limited to the value of the residence, reduced by any available reliefs and any debt. The residence must be 'closely inherited' which is defined as a lineal descendant, such as a child or grandchild (including adopted, fostered or stepchildren), or their spouse or civil partner.

"The property must have been the taxpayer's residence at some point during ownership!"

The RNRB is tapered for estates worth more than £2m and is lost for those worth more than £2.35m. Therefore, only taxpayers with estates worth £325,000 - £2.35m can potentially benefit from this relief.

The RNRB can be transferred on death to the surviving spouse or civil partner if the survivor dies after 5 April 2017. Care needs to be taken where the main residence is left to the surviving spouse as this could lead to a loss of the RNRB as highlighted in the example below:

Example 1:
Tom dies on 6 April 2017 with the following estate:

Residence - £800,000
Investments - £500,000
Cash - £100,000
Total - £1,400,000
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In his will, Tom left his entire estate to his wife, Jenny. Jenny's estate, after the transfer is:

Residence - £1,600,000
Investments - £1,000,000
Cash - £200,000
Total - £2,800,000

As Jenny's estate now exceeds £2.7m, no RNRB will be available unless Jenny looks to gift some of her wealth pre-death.

There is a 'downsizing provision' which is designed to try and ensure that taxpayers that downsize due to age or circ*mstance do not lose the benefit of the RNRB. To qualify 3 conditions must be met:

The taxpayer disposed of a former home and either downsized, or ceased to own a home on or after 8 July 2015
The house disposed of would have qualified for the RNRB had it been kept until death
At least some of the estate is inherited by the deceased's direct descendants

The amount of the downsizing allowance is normally equal to the RNRB that would have been lost because of the sale of the former home. To rely on this provision, careful records must be maintained and kept of the sale proceeds so that the lost RNRB may be ascertained when needed.

Further consideration should be made when drafting wills. It may be necessary to include a 'top up sum' in the will to ensure that sufficient value passes to the lineal descendants to use the full relief available.

Example 2:
Maggie lived in the family home until it was too big for her to maintain:

She, therefore, sold it for £400,000 and moved into a rental property. On Maggie's death, so long as she leaves the equivalent amount in assets to her lineal descendants, her executors can claim the full RNRB.

"These are complex provisions!"

Taxpayers that are looking to take advantage of the Residence Nil Rate Band should take advice and review their wills as soon as they can. For help with this, call me on 01908 774323 or click here to ping me an email and let's see how I can help you.

Until next time ...

HELEN BEAUMONT