Residence Nil Rate Band
Currently, each individual is entitled to a nil rate band (NRB) of £325,000 before inheritance tax is chargeable at the rate of 40%. Since October 2007 any unused percentage of the NRB can be transferred from a deceased spouse to the surviving spouse’s estate, this is called the transferrable nil rate band. Giving an overall tax free sum of £650,000 before inheritance tax is chargeable.
From April 2017 a new residence nil rate band (RNRB) of £100,000 per individual will be introduced. This will increase by £25,000 each tax year until it reaches £175,000 in the tax year 2020/21 as follows:
· £100,000 in 2017 to 2018
· £125,000 in 2018 to 2019
· £150,000 in 2019 to 2020
· £175,000 in 2020 to 2021
However the RNRB can only be offset against the value of the deceased’s interest in a property which has, at some point, been occupied as their residence and only if the residence is being left to a direct descendant (which includes step children, adopted children and foster children).
Any RNRB that has not been used upon the first death will be transferred to a surviving spouse even if the deceased could have used the RNRB or not. Therefore, if the first spouse died before April 2017 but the second spouse died after this date the second spouse’s estate can apply for the transfer of the unused RNRB even though the first spouse died before the new allowance came into effect.
The transfer of the residence can be by will, intestacy or survivorship and it must be an outright transfer. This means that should the residence pass into certain types of trusts, even if the beneficiary of the trust is a direct descendant, then the RNRB cannot be utilised. This would include the situation where a deceased has left property to a child and specified that the child is not to receive the gift before they reach, for example, the age of 21. If you have such provision in your Will and your estate would benefit from the RNRB then you may want to update this.
Where the value of the deceased’s estate exceeds £2m (after deducting debts and liabilities but before exemptions and reliefs) a tapered withdrawal of the RNRB will apply at a rate of £1 for every £2 over the threshold. Therefore, it is important to consider whether your estate can make use of this RNRB if Agricultural Property Relief or Business Property Relief would apply.
The RNRB and £2m threshold will increase in line with the Consumer Prices Index from 2021/22 onwards.
There are complicated rules regarding those who owned a residence that would have qualified for the exemption but have downsized. Generally, if the deceased maintained good records showing that the money in, for example, a bank account has come from the sale of their residence then the RNRB should apply. This gives some flexibility to those who may have to sell their residence to fund their care.
In light of the new RNRB coming into force should you wish to review your Will please do not hesitate to contact us. Please contact us on 0844 567 2222 by email at firstname.lastname@example.org or visit our website www.leedsday.co.uk