What families need to know about the residence nil-rate band
With property values continuing to rise, many families are concerned that their estates will be liable to Inheritance tax (IHT) at 40 per cent. The number of estates paying IHT leapt by 15 per cent last year alone, and has almost doubled in the last eight years.
However, April 2017 sees the introduction of a new Inheritance Tax (IHT) nil-rate band that is available in addition to an individual’s own nil-rate band of £325,000. It covers the main residence when it is passed to descendants. It was introduced in 2015 by former Chancellor, George Osborne, to reduce the burden faced by ordinary families. At the time, it gave rise to headlines suggesting that everyone could leave a tax-free legacy of £1m, but as you’ll see below, the changes are to be introduced in stages over the next few years, and don’t apply in every case.
The new Residence Nil Rate Band (RNRB) will apply if you want to pass your main residence to a child or grandchild. It’s important to note that only direct descendants can benefit, and that doesn’t include nieces and nephews for example. So not everyone will be able to rely on it for IHT planning purposes.
The allowance is being introduced in stages over 4 years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT which remains unchanged at £325,000.
How the RNRB applies
Once the changes are fully implemented, they will mean that each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. As it can be passed from one partner to another on death, when the first partner dies their allowance can be transferred to the surviving partner, meaning that they will then have an allowance of £1 million. Where a property is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.
Only one residential property will qualify for the relief, but it is possible to nominate which property is to qualify if there is more than one in the estate. Properties that have never been lived in, such as buy-to-let properties will not qualify.
Moving out of the property
The family home doesn’t need to be owned on death to qualify. This is a help to those who may have downsized or sold their property to move into care or to live with a relative. The RNRB will still be available, if the property disposed of was owned by the individual and would have qualified for the RNRB had the individual retained it, and if the replacement property or assets form part of the estate passed to the descendants.
To qualify, the downsizing or the disposal of the property must take place after 8 July 2015. There is no time limit on the period between the disposal and the date of death.
Planning for the future
It makes good sense to review the terms of your Will. The RNRB may be lost if the main residence is placed into a Discretionary Will Trust for the benefit of children or grandchildren.
The rules surrounding the operation of the RNRB and IHT planning are complex, so if your family looks set to face a liability to IHT, then we can offer advice to ensure you pass your assets onto your heirs as tax-efficiently as possible.