It’s been nearly two years since the government first announced its intent to introduce a secondary threshold, which will reduce significantly a ‘direct descendant’s’ Inheritance Tax (IHT) liability. From 6 April 2017, the terms of the Residence Nil Rate Band (RNRB) are set to come into effect. However, those with estates over £2million will lose out.
The RNRB is an additional exemption, which can be used in conjunction with the current IHT Nil Rate Band on estates of up to £325,000. Yet, this threshold will only provide a further saving to individuals who can pass on a ‘qualifying residence’ down to their direct descendants. The exemption starts in 2017 and will increase year on year with these thresholds:
|Tax Year||Maximum RNRB|
|2017 – 2018||£100,000|
|2018 – 2019||£125,000|
|2019 – 2020||£150,000|
|2020 – 2021||£175,000|
However, for an estate to qualify for the full RNRB, several conditions must be satisfied:
- It applies to Individuals who pass away on or after 6 April 2017
- The home must be owned (or part owned) by the individual: The exemption only permits one residence to qualify for the RNRB. This does not have to be the main residence that the deceased was staying in when they died. Any property that they lived in that forms part of the estate can be transferred. However, any property that forms part of the estate, which was bought for buy-to-let purposes and was never a residence of the deceased, will not satisfy the conditions of a RNRB claim. In some cases, an additional benefit for those looking to downsize or dispose of a property due to age, may be available.
- Only direct descendants can inherit part or a share of the house: HM Revenue & Customs state that a direct descendant will only be considered direct if they are a:
- Spouse: Married or Civil Partnership
- Children: Biological, step, adopted or foster children and any linear descendants. In the case of non-biological children, the RNRB exemption can be used as long as they are part of the estate and the deceased was a parent at any time during their life.
- The estate value must not exceed £2 million: If the estate (before any reliefs and exemptions) exceeds £2m the RNRB is gradually withdrawn .
The Tapering Effect
The government has applied a taper to estates with a value exceeding £2million. The tapering away of the RNRB will be reduced by £1 for every £2 over the value of £2million. Essentially, this means no RNRB will be available for estates in 2017-18 that are worth more that £2.2million and £2.35million in 2020/21.
The RNRB is available for transfer to a surviving spouse. Careful planning is needed however as if the surviving spouses’ estate exceeds £2m the amount of RNRB could be restricted.
So the Tory Government have found a way to get to the £1m exempt estate that George Osbourne talked about at his conference speech many years ago. By taking the £325,000 Nil Rate Band plus the RNRB of £175,000 once fully implemented and by making use of the transferable band rules to surviving spouses you reach the £1m exemption for a husband and wife (or civil partners). This has however been achieved in such a way that estates valued at over £2m will not be able to take advantage of the new measures.
IHT requires extensive and careful planning. If you would like to discuss the RNRB in further detail or your own personal case, please feel free to get in contact with me directly at email@example.com.