Residence Nil-Rate Band: the basics

The estate of an individual who dies on or after 6 April 2017 may qualify for an increased tax-free amount, the residence nil-rate band (RNRB), if their estate includes an interest in a home which is being left to their direct descendants. This is in addition to the existing nil rate band (NRB) of £325,000 for inheritance tax (IHT). We have already been told that the NRB will be frozen at this amount until 2021. IHT is taxed at a rate of 40%, however tax will only be payable on the value of the estate which exceeds the overall tax free amount (the RNRB and NRB). We address some basic questions regarding the RNRB below.

How much is the RNRB?

The RNRB will be phased in over the next 4 tax years and the maximum amounts for the RNRB are as follows:

–      £100,000 for 2017/18

–      £125,000 for 2018/19

–      £150,000 for 2019/20

–      £175,000 for 2020/21

From 2020/21 the RNRB will increase in line with the Consumer Prices Index (CPI). The RNRB for an estate will be the lower of the maximum amount of the band (as above) OR the net value of the interest in residential property (after deducting any liabilities such as mortgage).

This means that in 2021 a maximum tax free amount of £500,000 per individual will be achievable.

Will my estate qualify for the RNRB?

The conditions for RNRB to apply to your estate are that when you die you must have an interest in a residential property which:

1.    is part of your estate;

2.    has been your residence; and

3.    is ‘closely inherited’ (i.e. left to one or more direct descendants).

For the purposes of the RNRB, ‘direct descendants’ includes stepchildren, adopted children and foster children.  In addition, the spouse, civil partner, widow or widower of a direct descendant may also qualify.

The RNRB applies whether the property is inherited under the deceased’s Will, on intestacy or the property passes to a co-owner by survivorship.

Does it apply to estates of all sizes?

If the net value of the estate (after deducting liabilities but before reliefs and exemptions) is above £2m, the RNRB is tapered away by £1 for every £2 by which the net value exceeds that amount. Therefore, in practice this means that estates equal to, or exceeding the below net values will not benefit from the RNRB:

–      £2,200,000 for 2017/18;

–      £2,250,000 for 2018/19;

–      £2,300,000 for 2019/20; and

–      £2,350,000 for 2020/21.

What if I leave my estate to my spouse or civil partner?

Many people leave their estates to their spouses, should they survive them, and therefore their entire estates will benefit from the spouse exemption and no IHT will be payable as the charge is deferred until second death.

However, as with the NRB, the RNRB will not be lost. Should the full RNRB  or even a percentage of it have been unused to reduce the estate of the first to die, then it will be possible to transfer the RNRB so that it can be applied to the estate of the surviving spouse on his/her death. However, tapering provisions do apply to the estate of the first spouse to die, if its value exceeds the thresholds stated above.

What if I sell my property before I die?

The RNRB provisions include a downsizing relief which can be claimed where the deceased downsized to a less valuable residence or ceased to own a residence on or after 8th July 2015 as long as the smaller residence or assets of equivalent value are left to direct descendants.

It is fair to say that the scope of the RNRB is more limited than had originally been anticipated and the conditions that must be satisfied in order for it to apply are complex. However if you believe your estate may qualify for the RNRB, or more particularly if it just exceeds or is likely to exceed the threshold, then you should review your Will and succession planning carefully and seek advice to ensure that your estate benefits from the RNRB wherever possible. There are steps that can be taken to maximise the likelihood of qualifying for the RNRB and we can advise you about these.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.