Residence Nil Rate Band

As the introduction of the residence nil rate band draws nearer we take a look at the main criteria for using it and how it will work in practice.

Bear in mind that the final legislation is not yet in place so there could still be minor amendments and clarifications in respect of some of the more complex aspects. Based on the draft legislation we have summarised the main conditions and workings below.

The residence nil rate band (RNRB) will be introduced on 6th April 2017 to apply to deaths on or after that date. For those eligible to use it, it will be in addition to the standard nil rate band (NRB), currently £325,000. In summary, the RNRB is intended to protect some or all of the value of the family home from inheritance tax where the home (or, if the home has been disposed of, assets of equivalent value) is being passed on to children or grandchildren (or their spouses).

The RNRB will be phased in gradually from 2017/18 to 2020/2021 as follows: and then increasing in line with CPI in subsequent years

£175,000 per person in 2020/21
£150,000 per person in 2019/20
£125,000 per person in 2018/19
£100,000 per person in 2017/18

1: The RNRB can be offset against the value of a property which has, at some time, been occupied as the family home as long as that home passes on death to the direct descendants of the deceased. A direct descendant is defined as a child (including step-child, adopted child or foster child) or grandchild of the deceased. This includes the situation where the property is left to a direct descendant and their spouse or civil partner jointly, to a direct descendant’s spouse or civil partner solely, or to a direct descendant’s widow, widower or surviving civil partner who has not remarried or entered into another civil partnership at the time of death of the deceased.

The RNRB will be available when the individual dies on or after 6th April 2017. The transfer must be on death and can be made by will, under intestacy or as a result of the rule of survivorship

2: A direct descendant can be treated as inheriting the home if it was held in a certain type of trust before the deceased died and the property passes to them on the death of the deceased or they are entitled to benefit from the property and are treated as owning the property. Where the deceased had a qualifying interest in possession in residential property (for example, as the occupying beneficiary of a life interest trust), the lineal descendant will be deemed to inherit the property if he becomes beneficially entitled to it – this will be the case where a remainderman inherits property absolutely or where, on termination of the deceased’s life interest, the beneficiary becomes entitled to a disabled person’s interest.

3: The RNRB is also available where a qualifying residential property is left to a trust on death where the direct descendant is treated as owning the trust assets (ie. a bare trust); or one where the direct descendant has a qualifying interest in possession (that is, either an immediate post-death interest or a disabled person’s interest); or an interest which meets the conditions for a trust for bereaved minors or an 18-25 trust.

4: Where the value of the deceased’s estate (after deducting liabilities (such as mortgages) but before reliefs and exemptions (such as Business Property Relief)) exceeds £2 million then, broadly, the RNRB will be reduced by £1 for every £2 excess value. This means, for example, in 2020/21 there will be no RNRB available on first death if the net value of the deceased’s estate exceeds £2.35 million. This figure will be £2.7 million in 2020/21 on the death of the second spouse assuming their own and their deceased spouse’s RNRB are both available. The £2 million threshold is due to increase in line with CPI from 6th April 2021

5: The deceased’s RNRB (including any RNRB transferred from a deceased spouse or civil partner) will be set off against the value of the family home before the set off against the standard nil rate band.

6: Any RNRB unused on first death can be transferred to a surviving spouse or civil partner in the same way as the standard nil rate band. This applies whether or not the first to die could have used his/her RNRB and the date of first death is irrelevant. The amount unused (expressed as a percentage of the amount available) will be applied to uplift the survivor’s RNRB entitlement on second death.

7: Where the first death occurred before 6th April 2017, none of the RNRB will be deemed to have been used on first death, i.e. where the first death occurred before 6th April 2017, the estate of the surviving spouse will always be entitled to a 100% uplift to their RNRB (so, a double RNRB) – regardless of whether the first to die left an interest in a qualifying property direct to descendants. The exception to this rule is where the estate of the first to die exceeded £2 million. In this case, the transferable RNRB will be reduced by £1 for every £2 that the estate exceeds the £2 million taper threshold (for this purpose only, the RNRB is assumed to be £100,000 where first death occurred before 6th April 2017, ie. the £1 for £2 reduction is applied to £100,000). If the first spouse’s estate didn’t exceed £2m no reduction is required to the transferable RNRB and the full 100% uplift is available.

8: Where the deceased owned more than one property that at some point in time was their residence, their personal representatives will be able to nominate which residential property will be their qualifying residential interest. For IHT purposes, any mortgage is deducted from the value of whichever property the mortgage is secured on and this property might not be the individual’s main residence or the property being passed to direct descendants to benefit from the RNRB. Some rearrangement of the mortgage position might be required in order to take maximum advantage of the available RNRB. Take a scenario where the deceased owned one property worth £600,000 with a mortgage of £350,000, and a second property that he used to live in which is worth £200,000 and which he owns outright. Assuming it’s 2020/21 and the maximum RNRB of £350,000 is available to the deceased (his own £175k plus £175k available to transfer from his previously deceased spouse), as things stand, neither property enables full advantage to be taken as the net value of the mortgaged property is only £250k and the second property £200k. However, if £100k of the mortgage could be moved on to the second property, this would leave a £250k mortgage on the first property, giving a net value of £350k and allowing the full RNRB to be made use of.

9: With regard to lifetime gifts made for IHT planning, failed PETs and recalculated CLTs are disregarded when working out the amount of RNRB available (although once the level of RNRB is established, the failed PETs and CLTs will be taken into account in calculating the IHT liability if they were made within 7 years before death (and potentially up to 14 years for a CLT – if made within the 7 years before another CLT or a failed PET)

10: Any transferable RNRB must be claimed by the deceased’s personal representatives within two years from the end of the month in which the deceased died, or if later, within 3 months from the date when personal representatives started to act, or within a longer allowable period at the discretion of HMRC.

11: If a parent has made a lifetime gift of their residence and this falls foul of the gift with reservation rules and is added back to their estate for IHT purposes on death, then this can qualify for the RNRB

12: If the deceased has survived more than one former spouse, the maximum uplift is still 100% of the RNRB applicable at the date of death of the deceased. In a similar way to the standard transferable nil rate band, it is possible to bring forward unused RNRB from more than one former deceased spouse but only to the extent that the 100% limit is not exceeded.

13: Downsizing rules: where the family home is sold (or no longer owned) on or after 8th July 2015, the RNRB will still apply as long as assets of equivalent value are passed on death to direct descendants (or their spouses). This will ensure there is no disincentive to downsize or sell a home from the date the RNRB was announced at the Summer Budget. This will apply to situations where the deceased:

Downsized to a less valuable residence and that residence, together with assets of an equivalent value to the ‘lost’ RNRB, has been left to direct descendants.

Sold (or otherwise ceased to own) their only residence, and the sale proceeds, or other assets of an equivalent value, have been left to direct descendants

The broad intention is that an estate will be eligible for the proportion of the RNRB that is foregone as a result of downsizing or disposal of the property as an addition to the RNRB that can be used on death. In the Government Technical Note this is referred to as the ‘additional RNRB’. The qualifying conditions for the additional RNRB would be broadly the same as those for the RNRB, that is the:

Individual dies on or after 6th April 2017
Property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it.
Less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased’s estate (this would also include assets which are deemed to be part of a person’s estate)
Less valuable property, and any other assets of an equivalent value, are inherited by the individual’s direct descendants on that person’s death – direct descendants are the same as those in relation to the RNRB

In addition, the following conditions would also apply:

The downsizing or the disposal of the property occurs after 8th July 2015
Subject to the condition above, there would be no time limit on the period in which the downsizing or the disposals took place before death
There could be any number of downsizing moves between 8th July 2015 and the date of death of the individual
Downsizing would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it
Where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants
The value of the property would be the net value i.e. after deducting any mortgage or other debts charged on the property
The additional RNRB would be tapered away in the same way as the RNRB if the value of the estate at death is above £2m
The additional RNRB would be applied together with the available RNRB but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year
A claim would have to be made for the additional RNRB in a similar way that a claim is made to transfer any unused RNRB to the estate of a surviving spouse or civil partner.

Some worked examples:

Example 1

Anne sells a home worth £400,000 in August 2020 and moves to a home worth £210,000. At the time of the sale the available RNRB is £350,000 as, had she died at that time, her executors would be able to make a claim to transfer all the unused RNRB from her late husband (ie. she is entitled to 2 x £175,000). By downsizing, she has potentially lost the chance to use £140,000 or 40% of the available RNRB which could have applied had the more valuable home not been sold. When Anne dies in October 2020, the home is worth £225,000 and is left to her children together with £500,000 of other assets. The estate can use an RNRB of £225,000. However, the widow was eligible for an RNRB of £350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40% of the available RNRB (40% x £350,000) or £140,000. This would give a total RNRB of £365,000 (£225,000 + £140,000). But this is more than the maximum available RNRB (£350,000) so the additional RNRB is restricted to £125,000 to ensure that the total amount used does not exceed the maximum available. In addition, the existing nil-rate band together with any transferable nil-rate band claimed from her late husband’s estate can be applied to the remaining assets in the estate.

Example 2

Bob sells a home worth £300,000 in July 2020 and moves to a home worth £140,000. At the time the available RNRB is £175,000. He has potentially lost the chance to use £35,000 or 20% of the available RNRB which could have applied had the more valuable home not been sold. When he dies in December 2020, the home is worth £175,000 and is left to his son with the remainder of the estate passing to his wife. The estate can use the RNRB of £175,000 to the full and since the RNRB was fully used on death, there is none to transfer to the widow. However, none of the existing nil-rate band has been used, so it can be transferred and will be available on the widow’s death along with her own RNRB.

Example 3

Simon gives away his home worth £400,000 to his children in May 2020 and moves into rented ‘later living’ accommodation. At the time of the gift the available RNRB is £350,000. He has potentially lost the chance to use £350,000 or 100% of the available RNRB which could have applied had he not given away his home. When he dies in February 2021, within 7 years of the gift, his estate is worth £600,000 and is split between his four children. As there is no qualifying residence in his estate, it cannot use RNRB directly. But the estate is eligible for additional RNRB up to the maximum 100% of the available RNRB at his death or £350,000.

The position for the gift of the house is considered first. RNRB only applies to the assets in the estate, so it is not available in respect of the gift of the house. However, the estate can claim the full transferable nil-rate band (TNRB) of £650,000 so there is no tax to pay on the gift of £400,000. The balance of £250,000 TNRB remains available to be set against the estate.

RNRB is applied first against the estate of £600,000, leaving a remainder of £250,000. The balance of TNRB from his late wife’s estate is applied to this amount so no tax is payable as a result of the death.

Comment

The introduction of the RNRB will offer an IHT advantage for many people. However, bear in mind that:

The standard £325,000 nil rate band remains frozen until April 2021 (then increases with CPI)
The £1m of IHT-free assets that is often quoted in the headlines will only apply:

from 2020/21
to couples
whose main residence is worth at least £350,000
whose total estate is £1m or more
whose estate (on first or second death) doesn’t exceed £2m
who have children
who are able to pass their main residence (or assets of equivalent value) to children, grandchildren or the spouses of children/grandchildren

Single people, divorced people etc will only benefit from a single RNRB and those without children will see no benefit at all

HMRC will be publishing a list of FAQs in due course and more detailed guidance on all the RNRB legislation after Royal Assent of the Finance Bill

This guide is for information purposes only and should not be relied upon to make any financial decision. It is based upon our current understanding of Revenue & Customs guidance which is subject to change.

It is recommended that you seek professional financial and legal advice before entering into any arrangement.

The value of any tax reliefs are subject to your own individual circumstances and are subject to change,

The Financial Conduct Authority does not regulate Inheritance Tax Advice.

Inheritance tax – the main rules around the residence nil rate band

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