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The Residence Nil Rate Band in a nutshell

View profile for Mark Jones
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The Residence Nil Rate Band in a nutshell

Inheritance Tax is the tax that is payable on a person’s estate when they die. The first £325,000 of each estate (known as the “Nil Rate Band”) is free of IHT. Certain types of asset are also free of IHT or taxed at a reduced rate such as some business property and agricultural assets. Gifts to certain beneficiaries, such as a spouse or a charity, are also free of tax.

The nil rate band is transferrable between spouses so that a husband and wife, or civil partners, have a combined tax allowance of £650,000.

The nil rate band has been fixed at £325,000 since 2009 while values of assets generally have increased. In particular, increasing property prices meant have that many families who would not have expected to pay inheritance tax in 2009 were being drawn into the IHT net in recent years.

Partly to alleviate this problem, a new, additional inheritance tax allowance known as the “Residence Nil Rate Band” was introduced in 2017.

So, what is it and how might it affect you?

The Basics

The Residence Nil Rate Band (RNRB) is an additional allowance of £175,000. This potentially increases the combined inheritance tax allowance for a husband and wife or civil partners to £1 million (£325,000 plus £175,000 times 2).

The RNRB does not apply to very large estates, however, as it is withdrawn on a tapering basis for estates in excess of £2 million. This reflects the fact that the intention behind the RNRB when it was introduced was to assist families who might not consider themselves to be of vast wealth, who have been drawn into the IHT net simply because the value of their house has increased.

What Are The Conditions To Qualify For The Residence Nil Rate Band?

As the name suggests, the RNRB is available to set against the value of a property which is, or has been, your residence. As a starting point, and subject to the downsizing provisions referred to below, you need to own a residence or a share of a residence of sufficient value to cover the allowance.

The second condition is that the residence must be left to a direct descendant or descendants either under the terms of your Will or under the Intestacy provisions (the rules that take effect that say who should inherit your estate if you do not leave a Will).

What is a Direct Descendant?

For these purposes, a direct descendant includes:-

  • A child, a grandchild or other lineal descendants;
  • A spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner);
  • A child who is or was at any time a person’s stepchild;
  • An adopted child of the person concerned;
  • A child who was fostered at any time by the person concerned;
  • A child where the person concerned is appointed as a guardian or special guardian for the child when they are under the age of 18.

The child inheriting the home does not have to be under the age of 18 and a stepchild is limited to someone whose parent is or was the spouse or civil partner of the person concerned. Direct descendants do not include nephews, nieces or siblings.

Does The House Need To Be My Residence When I Die?

Not necessarily. The condition is simply that the property has been your residence at some point during the time you have owned it. So, for example, if you owned a property and lived in it as your residence, but moved out into rented accommodation before you died, whilst still owning the original property, you could still claim the Residence Nil Rate Band against the original property.

Will The Residence Nil Rate Band Still Apply if I Sell My House?

There are downsizing provisions to say that where a house is sold the proceeds of sale can, in some circumstances, be “earmarked” and still qualify for the Residence Nil Rate Band. These provisions are designed to apply to people who downsize as they get older or sell their house to move into residential care and it is important to keep clear records to show what the RNRB is claimed against. In particular, when the house is sold, it is important to keep a clear record of what happens to the proceeds of sale.

What Are The Traps And Points To Watch?

Like most tax laws, there are certain points to watch and potential traps to avoid. Amongst others, these include:-

  • The RNRB can only be claimed against one property or an interest in one property.
  • Where a husband and wife or civil partners own their residence in the name of only one or the other, they may need to consider whether it would be best to own it in joint names.
  • Many people who have Wills containing Trust provisions may need to review them. In previous years, it was quite common for husbands and wives to make Wills including Discretionary Trusts for other tax planning reasons and such Trusts can have the effect of stopping a property passing to direct descendants and, therefore, preventing the RNRB from applying.
  • Some Wills containing gifts to grandchildren and remoter descendants with age contingencies can also prevent the RNRB from applying by inadvertently creating Trusts.
  • If you own a holiday home it could, in some circumstances, be worth considering using it as your residence.
  • If your estate will exceed £2 million, it is important to consider the impact of the tapering provisions mentioned above.
  • If a husband and wife or civil partners have a combined estate in excess of £2 million it might not be sensible for them to leave everything to each other on the first death.

Conclusions

In conclusion, the Residence Nil Rate Band is a potentially valuable relief for many people, but the devil is in the detail. The qualifying conditions and potential traps are not entirely straightforward. If you believe that the Residence Nil Rate Band will apply to you but you have not reviewed your Will recently you should do so now. This will be particularly important if your existing Will contains Trust provisions.

For more detailed advice, contact Mark Jones in our Private Client Department.

Our articles are intended for general information purposes only and are not a substitute for professional advice tailored to your specific circumstances. We are always very happy to discuss any plans, issues or concerns you may have and to clarify how we might be able to help. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.