Inheritance Tax - the new 'Residence Nil-Rate Band'
Nobody likes the idea of paying Inheritance Tax. In general terms, provided that no gifts have been made in the seven years prior to death, everybody currently has an Inheritance Tax ('IHT') Nil-Rate Band ('NRB') of £325,000 available to their estate before IHT becomes payable at a rate of 40%. Whilst the Conservative government first spoke about increasing the IHT NRB to £1million way back in 2007, now the small print has been published, the reality is somewhat different.
In the 2016 budget, the government announced that for deaths on or after 1.4.17, an additional Residence Nil-Rate Band ('RNRB') would be available where a residence or an interest in a residence is 'closely inherited'.
When will the RNRB be available?
- A residence must be closely inherited. Broadly speaking, this means that it must pass to a child or grandchild, including stepchildren and adopted or fostered.
- A very limited number of Trusts may qualify for the RNRB. In particular, a typical grandparental settlement leaving assets to grandchildren at any age other than 18 will not qualify. This is an extremely common provision in Wills; we would therefore urge you to review your Will to consider if the RNRB will be available to your estate.
- You must have a residence in your name to qualify for the RNRB. If you have given your home away to your children or you are living in rented accommodation, your estate will not qualify.
How much is the RNRB going to be?
Initially, in 2017/18 the RNRB will be £100,000 and will increase by £25,000 each tax year until it reaches £175,000 in 2020/2021.
These are very much maximum figures. The RNRB will in fact be capped at the value of someone’s net interest in the property.
For large estates, the RNRB will be withdrawn at a rate of £1 for every £2 an estate exceeds £2million. This figure is frozen until 2020/2021. Tax planning is therefore crucial to ensure your estate will qualify for the maximum RNRB available.
Can the RNRB be transferred between spouses / civil partners?
Yes. If the residence is passed to a spouse or civil partner, their RNRB can be transferred to the surviving spouse / civil partner to use on their death in the same way the ordinary NRB can. This will mean that if everything is left to a spouse or civil partner, on the second death the surviving spouse’s executors can utilise the usual NRB and RNRB and then claim the unused allowances from the first to die.
On the second death, a surviving spouse or civil partner will have a maximum of £350,000 RNRB available. Adding this to a maximum combined £650,000 ordinary NRB you can see that the £1,000,000 talked about in the press may be achievable if wills and estate planning is done with the RNRB in mind.
What if I have more than one residential property?
The RNRB is limited to only one residential property.
With more and more people snapping up buy-to-let properties, estates containing multiple properties are becoming a much more common occurrence. Where someone owns more than one residence on his or her death, an election can be made as to which property the RNRB is applied to.
It is important to note that for a property to qualify, it must at some point have been a residence of the deceased.
What if I don’t own a property on my death?
If you downsize or dispose of a property after 8th July 2015, the property may still be eligible for the RNRB. Draft legislation proposes that a calculation will be undertaken to work out the amount of RNRB that has been lost as a result of the downsizing or disposal.
Whilst we wait to see how these will work in practice, one thing is certain - the RNRB provisions (and especially the draft downsizing provisions) will not automatically apply to everyone’s circumstances, unlike the historic NRB that was applicable to all estates. If you are as to any doubt as to whether your estate will qualify for the additional RNRB, advice should be sought to ensure that your beneficiaries will receive the maximum amount possible from your estate before tax.
If you would like advice on whether your estate will qualify for the RNRB, please contact Michelle Collins by phone on: 01603 724637 or email at: macollins@cozens-hardy.com to arrange an appointment to review your Will.