April 2017 saw the introduction of the Residence Nil Rate Band (RNRB) which is in addition to the standard Nil Rate Band (NRB) of £325,000 and will be available where the main residence of the deceased, or their share, is inherited by a direct descendent, for example, children or grandchildren.
The starting RNRB for an individual will be £100,000 increasing to £125,000 in April 2018, £150,000 in April 2019 before reaching £175,000 in April 2020. Thereafter, the increase each year will be in line inflation based on the Consumer Prices Index (CPI). In the current 2017/18 tax year, this new RNRB means a potential Inheritance Tax saving for an individual’s estate of £40,000.
The actual amount RNRB available will be the lower of; the net value of the home (current value less any outstanding loan against the property) or net share that is inherited by the direct descendants and the maximum RNRB available for the estate at the date of death. Just like the Nil rate band (NRB), any unused RNRB can be transferred between spouses and civil partners on death. Where the first spouse died before the 6th April 2017, their RNRB will also be available to transfer to the surviving spouse to use on second death. This means that from April 2020, a couple could benefit from a combined NRB of £1m (2 x £325,000 plus 2 x £175,000).
It is not uncommon for individuals to make the decision to downsize in later life, often purchasing a lower value property and thus realising equity. A scenario may also arise whereby an individual sells their property and moves into a care home or a relative’s home. In order to avoid penalising those that fall into these categories, the RNRB will still be available provided that, the event happened after 7th July 2015, the property disposed of was owned by the individual and it would have qualified for the RNRB had they not sold it AND the replacement property/assets or cash form part of the estate and pass to direct descendants.
Not all estates will benefit though. The ability for an estate to claim the RNRB will be reduced and/or lost completely on two occasions. Firstly, the RNRB will be reduced by £1 for every £2 that the deceased’s estate exceeds £2m, which essentially means estates valued in excess of £2.2m (rising to £2.35m in 2020/21) will not benefit. It is worth mentioning here that assets that qualify for Business Property Relief or Agricultural Property Relief, (which can often be excluded when calculating the amount of IHT due), will be included when calculating if the RNRB is available. If an individual’s estate is more than £2 million, it will be important to consider gifting at appropriate times, to try to obtain the RNRB. Interestingly the money can be gifted the day before death therefore assist with qualifying for the RNRB, but would still be classed as a potentially exempt transfer (PET) and so have IHT levied against it. Even in this scenario, you could at least benefit from access up to a further £175,000 per person, before IHT was due, if you qualify for the RNRB.
The second scenario whereby the RNRB will be lost is if the family home passes to someone other than a direct descendent and this point leads me onto the importance of reviewing your Will. If for example, the value of your estate on death (including your share of the family home) passes into a Discretionary Will Trust then the estate will not be entitled to the RNRB. The loss of the RNRB in this way does not however apply to all types of Trusts and therefore it is important to seek professional advice if you are unsure about your how the provisions in your will may impact your estates ability to claim the RNRB.
This RNRB it’s something that all estates that are subject to IHT should be considering and reviewing their eligibility to. This is one of the topics we will be discussing with our clients at their next forward planning meeting.