Inheritance Tax Residence Nil Rate Band
Will my estate pay less Inheritance Tax?
What is the RNRB?
With effect from 6 April next a new Inheritance Tax (IHT) relief will be available to people who own a residential property and leave it to close family members. This is known as the Residence Nil Rate Band (RNRB). In appropriate circumstances it is added to the ordinary Nil Rate Band (generally referred to as an exemption) which is available to an individual. Currently that is £325,000 and will remain so until at least 2020. All figures are doubled up for a couple.
The RNRB comes into existence on 6 April next. The initial amount is £100,000. This increases in each subsequent financial year, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. So by 6 April 2020 a couple may have a maximum of one million pounds IHT exemption in total.
The legislation is not particularly well drafted and contains a number of anomalies and illogicalities, so an article of this length cannot deal with it fully, only with its general principles.
To qualify for the exemption you must own a residence, or a share in one. Perhaps strangely it does not have to be your main residence but you must have resided in it at some point. If there is more than one possible property the executors can choose. The residence then has to pass down to ‘qualifying beneficiaries’. This term is widely defined and includes children, stepchildren, adopted children and even foster children, as well as later generations and spouses of any of the above.
If one spouse dies without fully utilising his or her exemption the balance transfers to the survivor. Oddly enough the first spouse need not have had a qualifying property interest. If the first spouse dies before 5th April 2017 and the second after that date, an additional exemption limited to £100,000 can be claimed.
Are there limits?
The exemption is limited to the value of the qualifying property. Also it begins to be lost if a person’s estate is over two million pounds, initially by tapering at the rate of £1 for every £2 of excess. This may adversely affect couples whose assets are not spread reasonably evenly.
Trading down and selling up
Where someone ‘trades down’ or sells up altogether after 5th April 2017, or even gives the property away, the exemption can still be claimed if the equivalent value is given to qualifying beneficiaries.
Problems can occur where the estate is left on discretionary trusts, but action can usually be taken to remedy this within two years of the death.
As always, professional advice should be taken on these complex rules in relation to tax planning, Will drafting and estate administration. For further help and advice please contact a member of our team on 0117 906 9400 or at firstname.lastname@example.org.