Residence Nil Rate Band
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Residence Nil Rate Band
Ian Winterbotham talks us through the residence nil band rate and what it means for estate planning.
Why is the residence nil rate band an important topic?
This is a great subject – it’s quite topical. People will know about nil rate bands, which have been talked about for many years. We have something called the residence nil rate band as well – and not everybody is familiar with that.
As a little recap, the nil rate band is the inheritance tax-free allowance that everybody has automatically, of £325,000. For a couple, that would be £650,000 which they can leave to their children or other beneficiaries, free of inheritance tax.
In 2017 George Osborne introduced something called the residence nil rate band – an additional allowance designed to let a couple leave up to £1 million pounds to their beneficiaries, free of inheritance tax. So the residence nil rate band, also known as the RNRB, is an extra amount that can pass on death without any inheritance tax being payable.
The allowance is currently set at £175,000 per person, which could save an estate up to £70,000 in inheritance tax. That’s just one estate, for a single person. So for a married couple or civil partners wanting to leave money to their direct descendants – children, grandchildren or adopted children etc., it could actually save another £140,000 on top of the £650,000 allowances that are already in place.
How do I know if I qualify for the residence nil rate band?
The RNRB is available if a person owns their own property and they leave it to lineal descendants. Whether there’s a Will or not, a person must have owned an interest in a property at the date of their death. They must have lived in it at some stage to qualify.
Anyone who now owns their own home and wants to leave their assets to their children, stepchildren, grandchildren or other potential lineal descendants who qualify, can allow their beneficiaries to claim these allowances and save the tax.
For a single person it’s applied on their death. For married couples or civil partners, there’s no inheritance tax to pay when the first person dies, assuming all assets are passed to the surviving spouse or civil partner. On the second death, both the residence nil rate band and the transferable residence nil rate band can be claimed.
That means that a total of £350,000 worth of RNRB allowances can be claimed on top of the £650,000 worth of Nil Rate Band Allowances. That adds up to the magic total of £1,000,000 of inheritance tax allowances for a married couple.
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How does the residence nil rate band taper for estates over £2 million?
We’re now jumping to a situation where people are leaving a big estate worth over £2 million on second death. The residence nil rate band allowances will reduce by £1 for every £2 that the estate is worth over and above the £2,000,000 taper threshold.
That means there will be no residence nil rate band allowances available for married couples or civil partners’ combined estates valued at more than £2,700,000 on second death.
In other words, only two nil rate band allowances would be available, giving total allowances of just the standard £650,000 and not the £1 million worth of allowances available on joint estates worth less than £2,000,000.
How can tapering reduce the residence nil rate band available for transfer?
Tapering would be applied on second death to a combined estate valued at more than £2 million. It would reduce the tax-free allowances down from £1 million to less than £1 million depending on the total value of the estates.
For single people it would reduce the tax-free allowances down from £500,000 to less than £500,000. So if a single person had an estate of £2,300,000, their beneficiaries could claim allowances up to about £450,000.
What happens if a home is worth less than the maximum residence nil rate band?
So the residence nil rate band is limited to the maximum value the person held in the residence – the place they lived in at some stage. So it wouldn’t necessarily be £175,000, it would be whatever the value of that property was.
For couples, if they owned a property worth £300,000 when they died, that would be the amount of the residence nil rate band allowance.
Who is a direct descendant? How do the direct descendants inherit the home and who is likely to be affected?
Direct descendants are children and anyone who was a stepchild at any time. It includes adopted children, a child who has previously been fostered or was being fostered at the time of death.
It can also be a spouse or civil partner of a lineal descendant, including widows or widowers or surviving civil partners. The allowances are widely available to lineal descendants.
The other part of the question, which is really important to understand, is that these beneficiaries do not actually need to physically inherit the home. They don’t have to receive the property in their name. These allowances are still available even if the family home has been sold prior to death.
So everyone qualifies for these allowances if they owned a home that they lived in at a certain date in 2016 or later – nearly everybody qualifies from that point of view.
What happens if the home is in a trust?
There would be a variety of different answers depending on the type of trust – whether it’s a lifetime trust or it’s left in a Will.
We’re just talking about will trusts generally, but if the home is the asset of a trust in a Will or a lifetime trust, then on the face of it, no residence nil rate band allowances would be available.
It rather depends on the type of trust. If it’s a life interest trust which is inherited absolutely on second death, the RNRB allowances would be available. If it’s inherited in a discretionary trust on second death, there are ways of appointing assets out of the trust. They are deemed to be inherited directly by the children or grandchildren or linear descendants. But that requires a deed of variation and procedures that must be done within two years of the date of death.
Generally, these allowances can usually be claimed, but you have to be quite careful about lifetime planning and the wording of the Will.
How can Will Power help somebody with regards to the residence nil rate band and other allowances?
It really is so important to review any Will you have, or any trust that might already be in existence. There are certain quirks to be aware of. Some existing wills quite normally would leave assets to grandchildren at age 21 or 25. You might leave everything to your children, and if they predecease you, it goes to your grandchildren.
But the estate would not qualify for the residence nil rate band allowances if all the assets are left to grandchildren at age 21 or 25. We have to be quite careful in the wording of wills to consider what assets might go to grandchildren and make sure they can inherit them at age 18 in certain circumstances – they would then qualify for these allowances. A small element of your Will could save £140,000 if it’s worded correctly.
Trust Wills should be reviewed regularly. Since assets must be inherited directly, many trust wills will not permit the estate to qualify for these allowances. Wills made before 2017 that leave discretionary trusts on second death, not just property trusts, should be reviewed carefully now.
There are also potential problems if properties have been transferred into lifetime trusts. So if you’ve settled your home into a trust during your lifetime, the residence nil rate band allowance will probably not be available. There are some trust wordings for lifetime trusts settled since 2017 that allow for this, but they should also be reviewed regularly.
So generally, most people are able to claim these very valuable additional allowances. But it’s still worth reviewing your will and your financial planning to make sure that it fits in with the current regulations.
When people die and we’re administering their estates, we do often find ways to to claim these allowances, but occasionally simple planning prior to death would have saved tens of thousands or even £140,000 for the beneficiaries.
