The residence nil rate band – time to review my estate planning?
Thursday 1st September 2016
A new inheritance tax allowance is being introduced which, if utilised correctly, will save families large amounts of inheritance tax and will take many estates out of the inheritance tax bracket altogether.
April 2017 signals the phasing in of a new inheritance tax allowance – the Residence Nil Rate Band (RNRB).
Presently, each person has the benefit of an inheritance tax allowance called the ordinary Nil Rate Band (NRB), currently £325,000. This allowance is transferable between spouses on death so, at its simplest, if a married couple left all of their assets to each other on the death of the first of them, then because gifts between spouses are exempt for inheritance tax purposes, when the survivor subsequently dies, twice the ordinary NRB in force at that time can be claimed against the estate. Currently therefore, this means that £650,000 worth of assets can pass free of inheritance tax on the death of the survivor of a married couple.
The new RNRB acts to top up the ordinary NRB (initially by £100,000 per person) and similarly, the new RNRB is transferable between spouses on death. The phasing in of this allowance (which is aligned with tax years) works as follows:
- 2017/2018 = £100,000 per person i.e. £200,000 for a married couple
- 2018/2019 = £125,000 / £250,000 (couple)
- 2019/2020 = £150,000 / £300,000 (couple)
- 2020/2021 = £175,000 / £350,000 (couple)
So to give an example, if we take a married couple where, on the death of the first spouse, all of the assets passed outright to the survivor, and then the survivor lived until after 6th April 2020, looking at this in isolation, the standard allowances that could be claimed are (i) 2 x the ordinary NRB i.e. £650,000 and (ii) 2 x the new RNRB i.e. £350,000. In total therefore, £1m worth of assets can pass free of inheritance tax on the death of the survivor of the married couple. For an unmarried individual, it follows that £500,000 of assets could pass free of tax on their death. Unfortunately however, unlike the ordinary NRB, the new RNRB does not automatically apply universally to everyone and cannot be applied against any and all assets of an estate. Broadly speaking, the qualifying conditions are as follows:
- The new RNRB must be applied against the value of the deceased’s residential property.
- The residential property in question must pass on death to a direct lineal descendant (which for this test includes children / grandchildren / step children / adopted children / foster children)
- If the overall value of the deceased’s estate exceeds £2m, the RNRB tapers away by £1 for every £2 the estate is over £2m.
It is worth adding that this is a stripped down review of the qualifying conditions and so, even if on the face of it you don’t believe the new allowance would apply to your estate, it is certainly worth exploring the issue further as you may be covered by supplementary provisions such as the “downsizing” rules or, alternatively, there might be an opportunity for you to undertake some simple inheritance tax planning.
In summary, whilst the new allowance is a welcome one, its particular application means that individuals need to consider their current planning, notably the content of their existing Wills, to ensure that they (i) understand the tax position on death and (ii) can take steps to mitigate inheritance tax should they wish to do so.
If you would like to discuss the new RNRB in further detail and how this may affect you, or if you simply wish to review your affairs generally and ensure your affairs are up to date, please do not hesitate to contact Greg Dixon on 0113 227 0202.