The residence nil rate band

If you happened to catch my previous article in January on gifting [1] you will have read that on death your estate must be assessed by HMRC to see if any inheritance tax (IHT) is due.

Your estate might be made up of things such as cash, investments, land, antiques, or art, but for most people the largest asset they own will be their home.

IHT is currently payable at a rate of 40% on the amount that exceeds the main tax-free allowance (or ‘threshold’) available to individuals which is commonly known as the ‘nil rate band’ (NRB).

The NRB has remained at £325,000 since 2009 [2] and it is not set to be reviewed until 2030. Given the rises in inflation and the rising cost of property over the years, this has increased the possibility that more people than ever will be paying IHT.

The government recognised this and so to help individuals and families leave more of their wealth to their descendants they created an additional threshold known as the Residence Nil Rate Band (RNRB). This came into force on 6 April 2017 and the current maximum amount of RNRB available to an estate is £175,000 per person. It is available when a property is left to direct descendants.

It is also possible to transfer any unused NRB or RNRB on death, but you must have been either married or in a civil partnership to be able to do so. They cannot be transferred if you were simply long-term life partners or were in a long-term relationship.

From an IHT perspective this means where a couple are married or in a civil partnership and leave everything to each other on 1^st death, and then their children on 2^nd death, the executors could have up to £1 million in nil rate bands before any inheritance tax is due.

Looking at the granular detail, HMRC outlines the RNRB can be claimed against the estate of someone who has died providing the following criteria are met:

• the deceased died on or after 6 April 2017
• the estate includes a residence owned by the deceased.

A residence is defined by HMRC as:

‘Any property that the deceased lived in as their home while it was included in their estate. It doesn’t have to be their main home or have been lived in or owned for a minimum period. A property that the deceased owned, but never lived in, such as a buy-to-let property, is not a residence and is not eligible for the RNRB.’ [3]

• the residence in the estate is inherited by the direct descendants of the deceased.

A direct descendant is defined by HMRC as:

• A child, grandchild, great-grandchild, or great-great grandchild of the deceased
• A husband, wife, or civil partner of a direct descendant (including their widow, widower or surviving civil partner)
• Stepchildren
• Foster children
• Adopted children; and
• If the deceased was an appointed a guardian or special guardian for a child who was under 18 at that time, the child is treated as a child of the deceased

Direct descendants do not include:

• Siblings, nieces, nephews, unmarried partners, or other relatives not included in the above [4]

What if you downsized a property?

The RNRB is available to an estate if you owned a family home and then downsized. It is also available if the family home had to be sold to fund care fees and is no longer part of the estate. This is known as the ‘downsizing allowance’. Importantly, there is no time limit between the sale of the home and the date of death, and there is no requirement to inform HMRC of the sale as this will be done when the executors of the estate complete the necessary IHT forms. To claim the downsizing allowance the following criteria must be met:

• the deceased must have disposed of a former residence and either downsized to a less valuable residence, or ceased to own a residence, on or after 8 July 2015
• the former residence would have qualified for the RNRB if it had been kept until death.
• at least some of the estate is inherited by the deceased’s direct descendants.

Tapering of the RNRB

Beware, the £175,000 RNRB is tapered by £1 for every £2 on estates over £2,000,000. For an individual, this means no RNRB is available if the estate exceeds £2,350,000, or £2,700,000 if you have inherited a RNRB from a deceased civil partner.

Transferring the RNRB

Both the NRB and RNRB thresholds can be transferred to the surviving husband, wife or civil partner on death if they are not used when the first person in a marriage or civil partnership dies. These are referred to as the transferable nil rate band (TNRB) and transferable residence nil rate band (TRNRB). This might be quite common if you have set up mirror Wills.

When an estate is assessed by HMRC, the RNRB is deducted from the value of the estate before the standard NRB. For example:

It is possible for a widow or widower who has remarried after the loss of a spouse or civil partner to make use of more than one TNRB and TRNRB in their inheritance tax planning. However, this can be quite a complex area and so specialist legal advice should be sought when considering this.

Beware of trusts

Complications can arise when applying for the RNRB if the home has been put into trust before or after death. It is therefore recommended you seek specialist professional advice from a solicitor when drafting your Will to ensure that your estate will be able to make use of all available thresholds.

In conclusion

In a world where tax and estate planning have become ever more complex, it is important to be aware of and make use of all available tax allowances where possible. Having a conversation with your financial adviser at your annual review meeting is the best possible way to ensure you are on top of this.

With any financial plan there should be a clear goal or aspiration set out at the beginning, followed up by a collaborative commitment to go after it with ambition. Planning on how to accumulate wealth and then decumulate it in your lifetime is just one aspect of wealth management.  Equal attention should be given to discussing how you wish to pass on your wealth to the next generation.

As always, the earlier on you start these conversations, the easier it is for us as financial planners to help you climb up and down that metaphorical mountain safely.