Residential Nil Rate Band

Residential Property Nil Rate Band: Reduced Inheritance Tax For Homeowners.

The Residential Property Nil Rate Band potentially adds £175,000 to the current £325,000 IHT-free allowance on the death of a homeowner after April 6th 2020.  For a couple, that means that the Conservative promise of a £1m Inheritance Tax-free amount has been met – for some people.

But there are catches, and it is essential that people potentially liable for IHT review their Wills to ensure they do not actually prevent them from benefiting from the allowance. Not doing so could cost your beneficiaries 40% of £350,000 which is a substantial needless tax bill of £140,000.  That is enough to buy some houses!  Our specialist team can help – you might wish to consider our inexpensive IHT Review Service.

The standard IHT nil rate band, meaning that it will now remain at the current level of £325,000 until at least 5 April 2021. After that it should be index linked.

The available residential property nil rate bands and basic nil rate bands:

 2017/18   £100,000  Single £425,000 Couple £850,000
 2018/19 £125,000Single £450,000Couple £900,000
 2019/20 £150,000Single £475,000Couple £950,000
 2020/21 £175,000Single £500,000Couple £1,000,000

From April 2021 the standard IHT nil rate band and the Residential NRB will go up in line with the Consumer Prices Index, rounded up to the nearest £1,000.  Bear in mind that the last increase was in April 2009! That means that many more individuals pay IHT, often just because of rising property prices.

New residential property nil rate band.

The new RNRB started in April 2017 at £100,000. It increases by £25,000 each year until it reaches £175,000 in April 2020. When added to the standard IHT nil rate band, the RNRB will potentially allow individuals to pass on a total of £500,000 before IHT tax-free. Provided the necessary conditions for the RNRB are satisfied, of course.  Unused Residential Property Nil Rate Band on the first death will be transferable between married / civil registered couples so that it can be used on the second death, even if the first death occurred before 6 April 2017.

Qualifying residential interest.

  • The deceased must have owned or part owned a property that was their home at some point during the period of ownership.
  • The RNRB is only relevant to the persons home. However, if they had two homes, the executors can decide which property will use the RNRB.
  • Non-homeowners will not benefit BUT the RNRB may still be available in some cases – e.g. where the deceased ‘downsized’ or sold a property to move into residential care.
  • Equity release loans (like mortgages) will matter, as it is the net value of the home that will be used to determine the allowable RNRD.

Descendants – have you left it to the right people? Or does you Will need to be reviewed?

  • To qualify for the RNRB, the property needs to be ‘closely inherited’.
  • The property must be passed either to lineal descendants such as children or grandchildren (this includes adopted children, step-children, fostered children and those under the special guardianship as defined by the Children Act 1989 s14A or equivalent legislation for Scotland and Northern Ireland and their children). The widow(er) or surviving civil partner of a lineal descendant who has not remarried or entered into a civil partnership by the time of the property owner’s death may also qualify.
  • If there are no lineal descendants that qualify, there will be no RNRB allowance.

Transferring unused residential property nil rate band allowance.

  • Unused RNRB can be transferred between spouses and civil partners to be used when the survivor of them dies. The transferable RNRB must be claimed by the executors within two years from the end of the month in which second death occurs.
  • Where the first death occurs before April 2017, 100% of the RNRB will be available to be transferred when the surviving spouse or civil partner subsequently dies in most cases.  However, where the estate was ‘large’ (see below).

Large estates.

  • There is a ‘taper threshold’ for large estates which, from April 2017, is set at £2 million, including the value of the residential property.
  • In determining whether the £2 million threshold is exceeded,  reliefs and exemptions are ignored. This is a big issue as it means that business property relief and agricultural property relief may push the estate over £2m even though they might not be subject to IHT.
  • Over £2 million, the RNRB that can apply to their estate is reduced by £1 for every £2 the estate in excess.

Downsizing.

The provisions apply to situations where someone has:

  • downsized to a less valuable home and the new property, together with other assets of an equivalent value to the ‘lost’ RNRB, has been left to lineal descendants
  • sold their only residence, and the sale proceeds (or other assets of equivalent value) have been left to lineal descendants
  • otherwise ceased to own their residence and other assets of equivalent value have been left to lineal descendants

The qualifying conditions for the RNRB after downsizing are broadly the same as those for RNRB:

  • The individual died on or after 6 April 2017
  • The property must have been owned by the individual and it would have qualified for the RNRB had the individual retained it
  • A lower value property, or other assets if the property has been disposed of, are in the deceased’s estate
  • A lower value property, and other assets of equivalent value, are inherited by the individual’s lineal descendants on that person’s death

In addition, the following conditions would also apply:

  • The downsizing or the disposal of the property occurs after 8 July 2015.
  • As for the RNRB, the value of the property would be the net value after deducting any mortgage or other debts charged on the property.
  • The downsizing RNRB would be tapered away in the same way as the RNRB for estates above £2 million.
  • The downsizing RNRB would be applied together with the available RNRB, but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year.
  • A claim would have to be made for the downsizing RNRB in a similar way that a claim is made to transfer any unused RNRB.

There will be no time limit on the period in which the downsizing or the disposals took place before death and there could be any number of downsizing moves between 8 July 2015 and the date of death of the individual.

Downsizing would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it.