The Residence Nil Rate Band – 7 Key Facts You Need To Know
As we’re all well aware, the tax system in the UK (and worldwide) is, to say the least (with tongue firmly in cheek), slightly complex and getting your head around it isn’t exactly the best way to spend your valuable time!
One tax that is in the news at the moment is inheritance tax (IHT).
IHT is a tax that is levied on the estate of a person when they die, which includes their worldwide assets if they are UK domiciled.
Introduced in 1986 (replacing Capital Transfer Tax) it generates billions every year for the Chancellor and as you can see, the amounts have been on the increase:
Of course, many astute individuals will be aware that there are many ways in which they can potentially mitigate any tax bill that their heirs may need to pay.
Unfortunately, the annual Canada Life IHT Survey for 2016 revealed that:
- Three fifths of people with a potential inheritance tax bill were unaware their estate may be liable for inheritance tax
- Over half didn’t know that the inheritance tax rate is charged at 40%
- 61% of UK adults aged over 45 with assets above the individual IHT threshold didn’t know that it is £325,000 (which has been frozen since 2009), putting their families at risk of an unexpected tax bill
- Over half of respondents (52%) were not aware that IHT is levied at a rate of 40%
- 24% of respondents didn’t know that their main home is liable for the tax
- 42% believed that ISAs are not assessed for IHT, when in fact they are (along with cash and other investments)
Whilst 78% believe wealth should stay in the hands of their family without being subject to inheritance tax, record HMRC tax receipts show that families are losing out due to a lack of knowledge / planning.
The £325,000 threshold is also referred to as the Nil Rate Band and it means that if a person’s chargeable estate is valued below this amount, no tax would be due.
Also, in most instances, the spouse or civil partner of the deceased will be able to apply to use their wife or husband’s Nil Rate Band on their death, meaning that £650,000 can be used (technically of course it will be the executor of the surviving spouse or civil partner’s estate!).
So, as we can see there’s a great deal of confusion over IHT.
And we’ve not even covered the allowances that you have available to help with reducing the tax on your estate, or the types of financial planning you can do (time won’t allow us to do this today, but we’ll cover it in due course).
The Residence Nil Rate Band
To add to the complexity, an additional Nil Rate Band is being introduced in April 2017!
We shouldn’t grumble too much as, for many, it will help to reduce the IHT on their estate.
Let’s look at the 7 key essential facts that you need to know.
1. It’s being phased in
The Residence Nil Rate Band (RNRB), which is designed to protect the family home from inheritance tax, will be £100,000 for deaths occurring in tax year 2017/18 and will be phased in gradually over four tax years at a rate of £25,000 per annum until it reaches £175,000 in tax year 2020/21.
2. Not all properties qualify
The RNRB will generally only be available to the extent that a ‘qualifying residential interest’ (QRI) is ‘closely inherited’.
A QRI is broadly an interest in a residential property that has, at some point during the deceased’s period of ownership, been occupied by him / her as a residence.
Buy-to let properties cannot therefore qualify as QRI’s, although a property that was once occupied by the deceased as a residence, but has been subsequently let to tenants, can.
3. Not everyone can benefit
The RNRB is only available where the QRI passes to children (including adopted, foster or step children) or linear descendants on death.
Also included is the spouses or civil partners of those children / grandchildren, as well as the widows / widowers, surviving civil partners of those children / grandchildren (provided that they have not remarried as at the date of the death of the property owner).
4. What if you downsize?
The good news is that the QRI (which will be the family home for many) doesn’t have to owned at the date of death.
This is to help individuals who have downsized or sold their home to move into residential care (or even the home of a relative).
The RNRB will remain available as long as the QRI was owned by the individual and it would have qualified for the RNRB had it been retained.
If the individual downsizes, the replacement property/assets must form part of their estate and pass to descendants (closely inherited).
5. The ‘normal’ Nil Rate Band is still £325,000 (i.e. frozen)
If the £325,000 was increased by say 2% pa since it was frozen in 2009 until 2021 when the RNRB will be fully introduced, it would stand at c£412,000, an £87,000 increase, which is just about 50% of what the RNRB will be eventually (£175,000 in 2021).
So whilst it’s a welcome allowance, it could be argued that it’s not much more than what should have been in place anyway!
6. Larger estates may not qualify
If your joint estate value exceeds £2.35m in 2021, you will not benefit from the RNRB.
This is because the residence nil rate band will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.
7. Make sure your review your will(s)
You should always keep your will(s) under review to ensure your assets will be distributed exactly as you want them to be on your death.
You should also bear in mind that property left to a discretionary trust can never be ‘closely inherited’, even if all the beneficiaries of the trust are direct descendants.
This can have implications for will drafting, and wills made before the changes were announced should therefore be reviewed to make sure that they remain tax-efficient.
As you can imagine, the devil is very much in the detail and we have only highlighted some of the main provisions, so make sure you seek professional advice to see how the new Residence Nil Rate Band applies to you.
You can a number of case studies on HMRC’s website.