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Inheritance Tax And The Residence Nil Rate Band

It's a complicated piece of legislation ...



The Residence Nil Rate Band (RNRB) has been with us now for just over 6 months. This blog post looks at a couple of the many pitfalls with this complicated legislation ...

The Residence Nil Rate Band is a complicated piece of legislation!

The Residence Nil Rate Band is a complicated piece of legislation!

copyright: maxxyustas / 123rf stock photo

To refresh, the RNRB was introduced to allow individuals to pass on the family home on death, potentially free of Inheritance Tax. It is in addition to the standard Nil Rate Band, currently £325,000, and is being phased in as follows:

  • 2017/18 - £100,000

  • 2018/19 - £125,000

  • 2019/20 - £150,000

  • 2020/21 - £175,000

The RNRB is limited to the value of the residence, reduced by any available reliefs and any debt. The residence must be 'closely inherited' which is defined as a lineal descendant, such as a child or grandchild (including adopted, fostered or stepchildren), or their spouse or civil partner.

"The property must have been the taxpayer's residence at some point during ownership!"

The RNRB is tapered for estates worth more than £2m and is lost for those worth more than £2.35m. Therefore, only taxpayers with estates worth £325,000 - £2.35m can potentially benefit from this relief.

The RNRB can be transferred on death to the surviving spouse or civil partner if the survivor dies after 5 April 2017. Care needs to be taken where the main residence is left to the surviving spouse as this could lead to a loss of the RNRB as highlighted in the example below:

Example 1:
Tom dies on 6 April 2017 with the following estate:

  • Residence - £800,000

  • Investments - £500,000

  • Cash - £100,000

  • Total - £1,400,000

In his will, Tom left his entire estate to his wife, Jenny. Jenny's estate, after the transfer is:

  • Residence - £1,600,000

  • Investments - £1,000,000

  • Cash - £200,000

  • Total - £2,800,000

As Jenny's estate now exceeds £2.7m, no RNRB will be available unless Jenny looks to gift some of her wealth pre-death.

There is a 'downsizing provision' which is designed to try and ensure that taxpayers that downsize due to age or circumstance do not lose the benefit of the RNRB. To qualify 3 conditions must be met:

  1. The taxpayer disposed of a former home and either downsized, or ceased to own a home on or after 8 July 2015

  2. The house disposed of would have qualified for the RNRB had it been kept until death

  3. At least some of the estate is inherited by the deceased's direct descendants

The amount of the downsizing allowance is normally equal to the RNRB that would have been lost because of the sale of the former home. To rely on this provision, careful records must be maintained and kept of the sale proceeds so that the lost RNRB may be ascertained when needed.

Further consideration should be made when drafting wills. It may be necessary to include a 'top up sum' in the will to ensure that sufficient value passes to the lineal descendants to use the full relief available.

Example 2:
Maggie lived in the family home until it was too big for her to maintain:

She, therefore, sold it for £400,000 and moved into a rental property. On Maggie's death, so long as she leaves the equivalent amount in assets to her lineal descendants, her executors can claim the full RNRB.

"These are complex provisions!"

Taxpayers that are looking to take advantage of the Residence Nil Rate Band should take advice and review their wills as soon as they can. For help with this, call me on 01908 774323 or click here to ping me an email and let's see how I can help you.

Until next time ...


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.