By Elena Tzialli
The Residence NIL rate Band with effect from 6th April 2017, a new inheritance tax relief came into force that could save the children of a married couple thousands of pounds in inheritance tax. Unfortunately, rather than simply raising the inheritance tax threshold from its current rate of £325,000, which would have been much easier to understand, the 'residence nil-rate band' ('RNRB') was introduced.
WHAT IS THE RNRB?
When anyone dies, the first £325,000 of their estate is free from inheritance tax. This is the nil-rate band ('NRB') that was already in force.
From 6 April 2017, the first £100,000 of a home's value is also exempt from inheritance tax, on the basis that it passes to a 'direct descendant' (see below). This threshold is to be phased in over several tax years as follows:
£100,000 in 2017/18
£125,000 in 2018/19
£150,000 in 2019/20
£175,000 in 2020/21
The NRB can then be applied to the balance of the value of the property and/or other assets in the estate.
WHAT ARE THE CRITERIA?
The property must have been the residence of the deceased at some point, so buy-to-let properties will not benefit. If an individual has more than one home, only one can attract the RNRB;
This relief is reserved for those who leave their home to their 'direct descendants' (although this is widely defined to include children, grandchildren, step-children, adopted children, foster children and the spouses of all of these people);
For estates that exceed £2million (even if the actual property is worth much less than this), the RNRB is reduced by £1 for every £2 that the estate is valued over £2million.
CAN YOU TRANSFER ANY UNUSED RNRB?
If a party to a marriage or civil partnership dies, passing their estate to their partner, then inheritance tax does not apply due to the spouse exemption (as long as the surviving spouse is domiciled in the UK).
However, the unused RNRB can be transferred to the surviving partner to be applied to their estate on their death. This is irrespective of when the first of the couple died, as long as the surviving partner dies after 5 April this year.
What if I sell my home or downsize?
The legislation incorporates'downsizing provisions' so that where a residence is sold (for example, to pay for care) after 8 July 2015, the RNRB is still available, as long as certain conditions apply.
What does this mean for me?
Given the complexity of the legislation, to benefit from this new relief it is essential that you revisit your Will to ensure that it is drafted in such a way that allows the relief to be claimed.
Additionally, it is imperative to discuss your Will if your circumstances have changed, for example you have married, divorced, separated or have had children.
For more information about the Residence Nil Rate Band and how the Private Client team can help protect the interests of you and your family, please contact Elena Tzialli.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.