Residence nil-rate band muddies the waters of inheritance tax

The information contained in this page is for professional Financial Adviser use only.

The following article was first published by New Model Adviser on 5th June.

The start of the new tax year on 6 April meant the introduction of the residence nil-rate band (RNRB), an additional threshold for inheritance tax (IHT) planning above the current £325,000 threshold. The new legislation was as a result of a Conservative party manifesto pledge in 2015.

We will take the family home out of inheritance tax for all but the richest by raising the effective threshold for married couples and civil partners to £1 million,’ the Tories pledged two years ago.

Plain sailing

The simplest approach would have been to raise the main IHT nil-rate band by £175,000 to £500,000. However, the new rules have created more complexity.

The RNRB is available to estates where the person dies after 6 April 2017 and:

  • Leaves an interest in a residential property, which has been their main residence at some point, to their direct descendants on death.
  • The direct descendants are children, which includes stepchildren, adopted and foster children, and their direct descendants.
  • May include the spouse or civil partner of a direct descendant, or a surviving spouse or civil partner, if not remarried at the time of the deceased’s death.

RNRB is to be phased in over the next four years, so the magical £1 million IHT threshold for a married couple, £500,000 each, will not be a reality until April 2020. (see below table)

The RNRB increase each tax year

Tax year         RNRB Increase            Total IHT allowance

2017/18             £100,000                         £425,000  

2018/19             £125,000                         £450,000

2019/20             £150,000                         £475,000

2020/21             £175,000                         £500,000

Source: gov.uk

Manoeuvring money

The amount of the RNRB personal representatives can claim is the lower of the net value of the interest in the property, or the maximum amount of the band. The amount is limited to one property, with personal representatives nominating which property should qualify where there is more than one property in the estate.

Any unused RNRB amount cannot be carried across to another qualifying property, and property that has never been a residence of the deceased, such as buy-to-let properties, will not qualify.

Any unused proportion of the RNRB may be transferred to a surviving spouse or civil partner where the survivor dies on or after 6 April 2017, regardless of when the first spouse died. Where the first death occurred before 6 April 2017, the RNRB is deemed to be £100,000, so the spouse’s estate will benefit with a 
100% uplift.

It is still crucial to consider the effect of any tapering of the IHT allowance.

Another key point is if the net value of the estate (the value after liabilities but before reliefs and exemptions) is above £2 million, as the RNRB is reduced by £1 for every £2 above that amount.

If the estate of the first to die is £2.2 million in 2017/18, they will lose all of the current £100,000 RNRB. For second deaths after 2020, where no RNRB was claimed on the first death, an estate of anything over £2.7 million could potentially lose both RNRB amounts of £175,000.

Size matters

There are what is known as the downsizing provisions. This is where all or part of the RNRB might be lost because the deceased had downsized or ceased to own a residence on or after 8 July 2015. The RNRB will still be available provided the deceased left the smaller residence or equivalent assets to direct descendants.

What could have been a simple solution has not turned out that way, raising a number of questions and concerns for advisers and their clients. As ever, quality financial advice is paramount to ensure people are not left out of pocket.

The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.

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