Residence Nil Rate Band, Big Changes Ahead for Inheritance Tax
Making sense of the new Residence Nil Rate Band with Probate solicitor James Palmer.
The current inheritance tax rules are relatively straightforward. Each person has an allowance (the ‘Nil Rate Band’) of £325,000; if your estate is valued under this amount there is no inheritance tax to pay. If it is greater, then any value over £325,000 is taxed at 40%. The Nil Rate Band is also transferrable between spouses/civil partners. As such, if one spouse dies and leaves their whole estate to the other, the surviving spouse’s estate will benefit from both Nil Rate Bands on their death.
It was thought that the Government would simply raise the current Nil Rate Band to fulfil their election promise. Instead, they introduced the Residence Nil Rate Band (RNRB), which will come into effect on April 6th 2017.
The RNRB will supplement the current Nil Rate Band, which will remain in place, and it could mean that from this April an estate benefits from an additional £100,000 inheritance tax allowance. This figure is due to increase by £25,000 every year until 2020, where it will reach its intended limit of £175,000. However, in order to benefit from the RNRB certain conditions have to be met.
Firstly, you’ll have to own your own property. Further, you must have been living in that property as your main home at some point before your death. As such, if you don’t own your own home you will not benefit from the RNRB.
Secondly, the property must be inherited by a direct descendent (e.g. children, grandchildren, stepchildren). As such, if you have no children of your own, or if you don’t want your children to inherit your property, your estate would not be able to use the residence nil rate band.
Thirdly, there are limitations surrounding estates exceeding £2 million. If this is the case, the RNRB will be reduced by £1 for every £2 over that £2 million.
The RNRB will be transferable between spouses/civil partners, in the same way the current Nil Rate Band is. Therefore, if a husband and wife leave everything to each other on the first of their deaths, before leaving their estate to their children on the second of their deaths, they could benefit from two Nil Rate Bands and two RNRBs. This could mean a combined inheritance tax allowance of £1 million after April 2020.
However, it’s clear that the RNRB will be limited to benefitting spouses/civil partners who have their own children and own their own homes.
There are certain pitfalls to be wary of, even if you could potentially benefit from the residence nil rate band. For example, if you’re an unmarried couple and you leave your estate to your partner first and foremost, your estate would not benefit from the RNRB. Further, a wide range of trusts would prevent an estate benefiting from the RNRB.
Given the complexity of the RNRB it’s essential for you to review your will and get the relevant advice regarding your estate to ensure you benefit from the new relieve if possible.
For a professional review of your will(s), please feel free to contact one of our Private Client lawyers today.
This article was published in the February edition of KL Magazine.