Changes to Inheritance Tax – the new Residential Nil Rate Band
The New Residential Nil Rate Band for Inheritance Tax – a Quick Guide
David Cameron pledged to raise the inheritance tax threshold to £1 million before the 2010 election.
This promise will be delivered by the introduction of the residence nil-rate band (RNRB) which comes into effect in April 2017. It is a complicated measure with a restricted scope.
What is the RNRB?
At present, every individual has a nil-rate band, (NRB) of £325,000 for inheritance tax. The tax only takes effect on a person’s taxable estate, (property owned by them at their death), above that figure. From 6 April 2017, the RNRB will be phased in. It will be £100,000 in 2017/18 and will increase by £25,000 every year until 2020/21 when it reaches £175,000.
As with the current NRB, any unused RNRB can be transferred to a surviving spouse or civil partner. By April 2020, the maximum combines IHT threshold for such couples will be a total of £1 million i.e. two nil rate bands of £325,000 equalling £650,000 plus two additional RNRBs of £175,000 – total £350,000.
When does the RNRB apply?
In simple terms, the RNRB may be available where:
- An interest in a property, (and/or the proceeds of sale of that property), which has been used by a person as his residence
- Is left on his death for the benefit of his direct descendants
- The value of the deceased’s estate is within a permitted range of values
Who is a direct descendant?
The category includes direct lineal descendants such as children and grandchildren. It also includes, step-children and foster children. It also includes those children and grandchildren’s spouses, civil partners, a widow/widower of or surviving civil partner of the deceased’s child, who has not remarried.
The RNRB only applies to transfers on death.
If a donor makes an outright gift of a property within 7 years of his death, the RNRB will not apply.
The property does not need to have been the deceased’s main residence (or his residence at the time of death).
It is sufficient if it has been used as his residence at some point during his ownership of it.
The Property does not have to left by will
If a joint property passes by survivorship or on an intestacy, the RNRB will apply.
The RNRB may still be available if the individual has down-sized.
The Finance Act 2016 extends the availability of the RNRB to those who downsize or cease to own a home on or after 8 July 2015, provided that their direct descendants are left some of their estate outright or on permitted trusts.
Unused RNRB may be transferred to a surviving spouse or civil partner
This will be possible even if the first spouse to die did not own a residence and also where the first death occurs before 6 April 2017.
The RNRB is only available on one property
If the deceased had more than one residence, his personal representatives can nominate which property is to benefit from the RNRB.
How does the RNRB affect trusts?
If a property is left on trust for direct descendants, the RNRB will only be available in limited circumstances for example where they have a right to trust income, the property is left on favoured trusts for children under 25, on a disabled person’s trust or orphaned children under 18. No RNRB will be available for discretionary trusts or trusts for grandchildren who do not receive the property outright on the deceased’s death unless the trust terms can be varied.
The RNRB will be tapered away for estates worth over £2million
In 2017/18, an estate over £2.2 million will not benefit from the RNRB at all. When the relief reaches £175,000 in 2020/1, the cut-off will apply to estates over £2.35 million.