What is the Residence Nil Rate Band?
As we reported in September 2015, from the 6 April 2017 the new residence nil-rate band (RNRB) comes into force, increasing the tax free allowance available on death. Under the new rules, from April 2020 it will be possible for married couples and civil partners to pass on assets worth up to £1million free of inheritance tax.
Initially the RNRB allowance will be £100,000 for an individual, and will be increased by £25,000 per annum from 6 April 2018 to a maximum of £175,000 by 6 April 2020.
The RNRB applies to people who own a property which is inherited by ‘direct lineal descendants’ which includes children, step children, adopted children and grandchildren.
How does the new RNRB work?
The RNRB is only available against the value of a property and cannot be applied to any other asset in the estate. In cases where the deceased owned more than one property, the Executors can nominate the property to which the RNRB should apply to, provided that the deceased lived at that property at some point. If the property is worth less than the available RNRB, the balance cannot be transferred to another property. Any debts on a property such as a mortgage will of course reduce the value of the property.
If a property passes to the surviving spouse on the first death situation, the unused RNRB can be passed to the surviving spouse in the same way as the general nil-rate band (which currently stands at £325,000) can be transferred. The RNRB can be transferred to the estate of the surviving spouse even if the deceased spouse passed away before the 6 April 2017.
If an individual has disposed of their property or downsized after the 8th July 2015 then it may still be possible to claim the RNRB against the sale proceeds of the previous property.
For estates that are worth over £2million, the RNRB allowance is reduced by £1 for every £2 above the £2million limit.
It is important to stress that the beneficiaries of the property have to be entitled to the property as at the date of death of the deceased. If a property is left to grandchildren upon them attaining the age of twenty-one, for example, the RNRB would not be available. The RNRB is only available against certain types of trust. If the property has been left into a Discretionary Trust the RNRB may not be available unless the Trustees appoint the property out of the Trust.
The RNRB will not be available if you have given away your property during your lifetime despite the fact that the value of your property may still form part of your estate if the gift was made during the last seven years of your life or you have retained any benefit from the property.
Should I change my Will?
It is important to keep your will under review. If your estate is worth more than £325,000 (for an individual) or £650,000 (if married or in a civil partnership) you may need to review your will to ensure you qualify for the maximum RNRB available.
If you have stated that grandchildren should inherit at a certain age or that your children should inherit at an age greater than 25, you may need to review your wills.
Married couples or civil partners with an estate worth more than £2million and all unmarried couples should review their wills and consider redirecting assets on the first death.
If you are concerned about Inheritance Tax or want to know how the RNRB will apply to your estate contact our Wills & Probate team on 0800 138 0458.