The Residence Nil Rate Band – assumptions could cost £140,000 in tax

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Not considering the finer detail of the Residence Nil Rate Band (RNRB) rules could cost £140,000 in Inheritance Tax (IHT)!

Under the RNRB rules, introduced in 2017, individuals can claim an additional allowance of £125,000 to reduce IHT due on the family home on death, in addition to their current £325,000 Nil Rate Band.

This new tax allowance will rise to £175,000 by 2020 and is transferrable between spouses and civil partners, allowing a couple to pass on £1 million tax-free. The rate of IHT is 40% on any amount in excess of this threshold.

The new allowance is only available for those leaving a residence to direct descendants which includes children and step-children (and their children), but not, for example, nieces and nephews or siblings.

However, there are a number of pitfalls with the RNRB which mean that its practical application may not always be as straightforward as may initially appear.

First, complications can arise in assuming that the RNRB has been transferred to the surviving spouse or civil partner of the deceased, when in fact it may be the case that the deceased has already used some of their RNRB.

Second, the existence of a trust can add to the complexity of the situation. Trusts are massively useful tools when it comes to estate planning, but property which has been left in trust may not qualify for the RNRB. It is therefore highly advisable to review the terms of any existing Wills and trusts as soon as possible. The availability of RNRB will depend on the nature of the trust involved and whether the home involved is considered as part of the estate for IHT purposes.

Third, if an individual has ‘downsized’ or sold their property in order to move into residential care or a relative’s home they will generally not be penalised as the RNRB should still apply, but this tax break is not always available depending on the circumstances.

Fourth, higher value estates, worth more than £2 million, will be subject to IHT claw back. The maximum RNRB is reduced or ‘tapered away’ at the rate of £1 for every £2 that the value of the estate is more than the Taper Threshold of £2 million (up to 5 April 2021).

For example, if a surviving spouse or civil partner dies with an estate valued at £2.5million, the threshold is exceeded by £500,000 and so £250,000 of any available RNRB is lost. If the first spouse died before 6 April 2017, the RNRB is deemed to be £100,000 so the unused RNRB is reduced to nil where the estate was valued at £2.2 million or more.

For those with assets around £2 million, it is worth giving estate planning strategies full consideration to avoid loss of the RNRB.

For those who cannot qualify for the RNRB – for example, those who have no children or grandchildren – consideration should be given to other IHT planning measures, especially as the Nil Rate Band of £325,000 is now frozen until at least April 2021.

So, upon closer inspection, it is evident that the RNRB is not good news for everyone and it goes to prove the old adage: you can’t please all of the people all of the time. For more information on IHT planning, please contact us.