The Residence Nil Rate Band – The Basics
“I am Death, not taxes. I turn up only once” – Terry Pratchett. It’s a fact of life that death and taxes are inevitable. In the words of American J.S. Watts, “death and taxes may be inevitable, but they shouldn’t be related”. Sadly, death and taxes do turn up together. Estates in the UK worth in excess of the current nil rate band of £325K are taxed at 40%, less exemptions and reliefs. With the proper advice and planning, you can ensure your estate pays no more inheritance tax than necessary when “The Grim Reaper” calls.
The Transferable Nil Rate Band
Most of us are now familiar with the transferable nil rate band which has existed since 2007. This allows spouses or civil partners to claim any unused nil rate band on the death of the survivor. The maximum amount available is currently £650K. It’s important to note that the Transferable Nil Rate Band does not automatically apply just because you are married or in a civil partnership. In the case of second marriage, for example, the transferable nil rate band cannot be applied if a spouse leaves their estate to the children from their earlier relationship rather than to their husband, wife or civil partner.
An Englishman’s Home is his Castle, so they say. What’s the background to the Residence Nil Rate Band?
In 2007, the Conservative Government announced their intention to increase the nil rate band available to £1m. Things are never quite that simple though are they? Since 6th April 2017, the first £100,000 of the value of a home has been exempt from inheritance tax, subject to certain qualifications. This figure will rise to £175,000 by 2021.
Bad news for the very wealthy; the Residential Nil Rate Band reduces where the whole estate is worth more than £2m. That is so, even where the value of the home itself is less than £2m.
How is ‘the home’ defined?
To qualify for the RNRB the deceased must have lived in the house. If you own more than one house, only one can have the benefit of the residential nil rate band exemption and it cannot be spread over two properties. If you are in that situation therefore, the home to which the exemption applies should be carefully selected. Investment properties or ‘Buy to Lets’ will not qualify.
To qualify for the addition inheritance tax relief, you must leave your home to a direct descendant. The definition of ‘direct descendants’ for these purposes is extremely wide. It includes; children, grandchildren or other lineal descendants, the civil partners or widows or widowers of lineal descendants, step-children, adopted children, foster children or children for whom the deceased was appointed as guardian.
If you are unmarried, your partner’s children will not be classed as a direct descendant.
If you have to sell your home to move into full time residential care, then the residential nil rate band can still apply, subject to certain other conditions.
How do Trusts affect matters?
The Residential Nil Rate Band only applies to direct descendants with an Immediate Post Death Interest. Certain other trust arrangements will not benefit.
Should I change or review my Will?
Given the complexity of the legislation, you should certainly consider redrafting your Will if any of the following apply:
- Your existing Will contains a Discretionary Trust
- You have left your estate to the children or grandchildren with an age contingency
- Your have left your estate to anyone other than a direct descendant
Please do get in touch with Jennifer Norman, if you require any further advice.