What is the residence nil rate band?
And how will it affect me and my loved ones?
Inheritance tax (IHT) is charged on your death at the rate of 40% based on the value of your assets. Everyone benefits from something called “the nil rate band”. This means that at the moment a 40% tax rate applies if your estate exceeds £325,000.
However, since 6 April 2017, a further additional residence nil rate band (RNRB) connected with your house can sometimes be claimed, meaning that less IHT may be paid when the family home is left to children, grandchildren and some other individuals.
The exact wording of your Will, and the way you own your property, can potentially affect the ability to claim this additional relief, so it is crucial that everyone reviews their Will, or, if they do not have one, make sure a Will is put in place as soon as possible. to make sure that your family can claim the RNRB when you or your spouse, or civil partner, die.
How will the RNRB impact my estate and family?
If you leave your interest in the family home to direct descendants, such as your children or grandchildren, or even some other individuals such as stepchildren or foster children, your estate may well be able to claim the tax benefits offered by the RNRB. This is in addition to the existing £325,000 Nil Rate Band,
This can mean that by having the correct wording in your Will and using the RNRB, many thousands pounds worth of additional assets could pass to the next generation without a charge to IHT.
Although the RNRB cannot be claimed on the estate of someone dying before 5 April 2017 there are still further benefits available, as your surviving spouse or civil partner may be able to carry forward RNRB which can be used when they eventually die.
At the moment, subject to some conditions, your family can benefit if:
- You leave an estate valued at less than £2 million. This is likely to rise with inflation from 6 April 2021. The RNRB is tapered down for estates worth more than this.
- You leave your home to “qualifying beneficiaries”.
Even if your estate exceeds £2 million it is still prudent to have your Will reviewed as, with proper planning, it may still be possible to arrange your affairs so that the RNRB can be claimed.
How much is the RNRB worth?
|Tax year||Residence Nil Rate Band||Standard Nil Rate Band||Combined nil rate bands for both spouses (or civil partners)|
|Before 2017-18||£100,000 (can be carried forward for surviving spouse or civil partner’s use).||£325,000||£850,000|
The table below shows the RNRB levels that the government has announced (which can be added to the main nil rate band to increase the amount of assets in your estate that will be taxed at 0%). The combined nil rate bands could be worth as much as £1 million by 2021.
Selling your home.
The good news is that even if you sell your home or downsize usually the RNRB is still available (provided that you sold your home on or after 8 July 2015) and at least part of your estate is inherited by a qualifying beneficiary.
I live in a property I have already gifted to my children.
If you have already given away your home to your children, it does not automatically disqualify your estate from claiming the RNRB. If, for example, you are continuing to live in the house, and are not paying any rent, it may still be possible to claim the RNRB, and likewise if you live with your children in the house together. However, make sure your Will is reviewed to avoid problems later.
I own more than one property.
As long as one of them has been your residence during your lifetime, your executors can decide which one will benefit from the RNRB.
Review your will or make one for the first time
As you can see the Residential Nil Rate Band has made an enormous difference to the way we plan our Wills, and how we leave our assets to our loved ones. We strongly recommend that you review your will (or make a will if you don’t have one). The conditions for claiming the RNRB are complicated, and we would be delighted to explain them to you, to ensure that your family can benefit from the enhanced nil rate band when you or your spouse or civil partner die.
It is particularly important to be aware that your existing will may well need to be updated to make maximum use of this new tax-saving measure.
Examples of common situations
The surviving spouse wants a life interest in their spouse’s share in the house.
John and Mary, a married couple, jointly own their home. They have four adult children. John’s will states that Mary should have a life interest in his half of the home after he dies and for the four children to inherit his half when Mary dies. Mary’s will mirrors Paul’s. If Paul dies before Mary his estate will not benefit from the RNRB, but Mary’s estate can carry forward his unused RNRB as well as using her own RNRB.
Home already sold
Douglas is a widower with two adult children. His wife died in 2014. He sold his home in August 2015 and now lives in a rented, warden-assisted flat. Even though he no longer owns a property, he can benefit from the RNRB if he leaves some of his estate to his children. He can also carry forward his wife’s unused RNRB even though she died before 6 April 2017.
Unmarried and no children
Michael is not married or in a civil partnership. He owns his home jointly with his partner Sarah who is a widow. She has two adult children from her marriage. Michael cannot benefit from the RNRB because he does not have any children and has not adopted Sarah’s children. She can potentially benefit could benefit from the RNRB IF she leaves her interest in the family home to her children. It would be different if Michael and Sarah were married as Michael could use his RNRB because Sarah’s children would be his stepchildren.
Home already gifted
If, for example, a parent has already gifted her home to her daughter some time ago, the RNRB will be available if the parent but continues to occupy the property without paying rent and dies on or after 6 April 2017.
Assets worth over £2 million
Let’s say Tim and Patricia jointly own a house worth £1 million. They have two adult children. Tim has investments worth £1 million and Patricia likewise. Tim’s will gives his entire estate to Patricia if he dies first. Patricia’s will mirrors Tim’s. Tim will not be able to benefit from the RNRB when he dies because his estate will pass to his wife rather than his children. If Patricia survives Tim and inherits everything, her estate could be worth more than £3 million, so the RNRB cannot be claimed on her death. In these circumstances we can help you take the necessary steps to avoid this. For example, Tim and Patricia could revise their wills so that part of the estate of the first to die is inherited by their children, even if their own rights are fully protected until their own demise.
We would be delighted to offer you a free initial meeting so that we can discuss what planning may assist you and your family. Please contact Christopher Seddon (firstname.lastname@example.org) or another member of our team.
This article is for general commentary only and does not constitute legal advice. If you would like to discuss any of the issues discussed in this article, please get in touch.
Cheyney Goulding LLP, solicitors in Guildford, Surrey