Residence Nil-Rate Band

Residence Nil-Rate Band

Every individual has a nil-rate band of £325,000, meaning that Inheritance Tax is only payable on anything over this threshold. This is taxed at 40%.

As of 6th April 2017, the Government has introduced an additional Residence Nil-Rate Band (RNRB) that means by 2020, families can pass on £1 million free from Inheritance Tax. This is conditional on the main residence being passed down to direct descendants, such as children and grandchildren (this includes stepchildren, adopted children and foster children but not nieces, nephews or siblings).

The new RNRB is going to be increased incrementally from April this year until April 2020 as it will go up each tax year:

Maximum residence nil-rate band
2017-18 £100,000
2018-19 £125,000
2019-20 £150,000
2020-21 £175,000

 

These are the maximum amounts available. Therefore, if the value of your main residence is less than this, the allowance will be reduced.

Important points to bear in mind:

  • If you have Trusts in your Will, you may not qualify for the RNRB.
  • Intestacy rules may not take advantage of these tax savings. Therefore it is important for individuals and couples to have a Will or check that they have the most up-to-date, tax efficient Will.
  • Even if the first spouse dies before April 2020, on the second death, the full £175,000 can be transferred to the second spouse provided that the second spouse survives until after April 2020.
  • This allowance is only available on one property. If a couple has multiple residences then it will be down to the personal representatives to make a decision on which one qualifies as their main residence. Buy-to-let properties will not qualify.
  • If before death an individual or couple downsized their property or moved into a care home and no longer had a property, it is still possible to take advantage of the RNRB on the previously-owned property. It is essential that good records are kept each time a residence is sold and a new property is purchased in its place.
  • The overall value of the estate cannot exceed £2 million or the relief is abated by £1 for every £2 over this limit.

Case Study:

We have been instructed to administer the estate of Mrs B where the deceased died on 10th April 2017 and her husband died many years ago leaving his estate to his wife. As Mrs B’s Will left everything to her children, we are able to apply for the benefit of the RNRB. This includes the additional £100,000 of the deceased, but also her late husband’s £100,000 which can be transferred despite him passing away before the RNRB was available. This is in addition to the nil-rate band that can be claimed for both Mr and Mrs B, meaning the estate can pass on £850,000 free from inheritance tax.

The above example shows how the new RNRB can provide a very useful additional tax saving. By April 2020, this will be an additional tax saving of £70,000 for individuals and £140,000 for couples.

For more information on the RNRB and tax planning, or if you require an up-to-date, tax efficient Will, please contact one of our Wills, Trusts and Probate solicitors on 020 3814 2020.