As promised within my Autumn Statement analysis last week, I am giving more details here on the new IHT Residence Nil Rate Band (RNRB) being introduced in April 2017 which is in addition to an individual’s own nil rate band of £325,000.
How much will it be?
It will be phased in over 4 years and the full £175,000 allowance will not be available until April 2020. The RNRB will start at £100,000 and will increase by £25,000 each tax year until 2020:-
Maximum residence nil rate band
2017 / 2018 £100,000
2018 / 2019 £125,000
2019 / 2020 £150,000
2020 / 2021 £175,000
Who can benefit?
The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death.
The rules have been extended to accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.
Clients with large estates may not see any benefit from the extra nil rate band. The RNRB will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.
This will mean that on it’s introduction there will be no RNRB available if the deceased holds assets of more than £2.2M. This will rise to assets of £2.35M in 2020/2021 when the full £175K allowance kicks in.
Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.
When the RNRB can be transferred?
The RNRB will be transferable between spouses and civil partners on death, much like the standard nil rate band. It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death. There will always be an additional 100% RNRB unless the first spouse’s estate was greater than £2M.
What if the family home passes into trust?
The RNRB may be lost where, for example, the property is placed into a discretionary will trust for the benefit of the children or grandchildren.
However, some trusts for the benefit of children and grandchildren will not result in a loss of the allowance. If the trust gives a child or grandchild an absolute interest or interest in possession in the home the RNRB can still be claimed. Other trusts such as Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts will also retain the additional nil rate band.
What about downsizing?
The family home doesn’t need to be owned at death to qualify. This is of help to those who may have downsized or sold their property to move into residential care or a relative’s home.
Only one residential property will qualify. It will be down to the personal representatives to nominate which residential property should qualify if there is more than one in the estate.
A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.
Joint tenants and the trap for large estates
Some clients may miss out on the additional nil rate band by not ensuring that their estates are shared in the most efficient way.
Many clients will hold the family home as joint tenants. On the first death this means the house passes to the surviving owner with no IHT because of the spouse exemption. The RNRB is not used on the first death with the surviving spouse inheriting the full unused allowance. But if the combined estate on the second death is greater than £2M then both RNRBs could be lost due to tapering.
Switching property ownership into tenants in common will allow each spouse to control how the property passes on death, and potentially preserve their entitlements to the RNRB by keeping each partner’s assets below £2M. On the first death, the deceased could use their RNRB by leaving part of their share in the family home to their children. In turn, this would reduce the value of the survivor’s net estate.
Basic IHT threshold frozen
While clients may be getting some additional nil rate band to set against the family home, the basic IHT nil rate band will be frozen at £325,000 until the end of 2020 / 2021 tax year.
When combined with the full RNRB of £175,000 in 2020 / 2021 this would provide a married couple with up to £1M nil rate band.
As with all financial planning, professional advice should be sought and in the case of estate planning it is strongly recommended that the services of a solicitor are utilised.