Inheritance Tax Update The Residence Nil Rate Band
The government have recently introduced new legislation on inheritance tax called the Residence Nil Rate Band (RNRB) which will apply to deaths on or after the 6th of April 2017. This could apply to you if the value of your estate is worth more than the current Basic Nil Rate Band of £325,000 and you are leaving a residential home to a lineal descendant.
The added threshold will then increase the amount of your estate that you may leave in your will without paying pay inheritance tax. However the RNRB applies to property only and the additional tax saving cannot be applied to other assets.
How to qualify
The house must have been occupied by the deceased as a resident. The house can then only pass down to lineal descendants which can include;
– Their spouses/civil partners
– Adopted or foster children
– Step children etc.
The RNRB is increasing over future years before it reaches its maximum of £175,000 per persons. This means that for deaths in the following tax years it will be:
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 from April 2020
The amount of RNRB due for an estate will be either (whichever is less);
- The value of the property; or
- The maximum RNRB available at the date of death
Overall, this would mean that after April 2020 the maximum amount of assets that can pass inheritance tax free could become £500,000 per person when combining the Basic Nil Rate Band and the Residence Nil Rate Band. If you are leaving everything to a spouse then all assets transfer free of inheritance tax. This means upon the first death, both your Residence Nil Rate Band and your Basic Nil Rate Band will transfer to the remaining spouse. This means that upon the second death, the total may amount to £1,000,000 of overall assets which would be inheritance tax free. However, in order to use the full combined RNRB you must have property worth £350,000 or more as any unused RNRB cannot be transferred to other assets.
Max is unmarried and dies in the tax year 2021 leaving a residential property worth £350,000, and other assets totaling an additional £150,000 to his children.
The maximum available RNRB in the tax year 2021 is £175,000.
|Basic threshold (NRB)||£325,000|
|Additional threshold for the estate (RNRB)||£175,000 (the lower of £350,000 and £175,000)|
|Total Estate value||£500,000|
|Minus RNRB||– £175,000|
|Minus NRB||– £325,000|
|= Amount of estate on which Inheritance Tax is due on||£0.00|
If you have downsized your property and then pass away within two years of the sale then you may still be eligible for the RNRB. This means if you have lost out on receiving the extra allowance because your property is now worth less, then you may still be able to apply for the RNRB to receive the top up you would have received on the price of the original property.
The RNRB does not apply where those who benefit from the Will cannot obtain the house at the date of death. For example, where the house is left to a grandchild to receive at the age of 21, the property would be held in trust rather than passing straight to the grandchild after the death and therefore the additional threshold would not apply.
There is also a condition for estates over £2,000,000 where the additional top up available will gradually decrease by £1 for every £2 the estate exceeds the £2,000,000 threshold.
In light of these new rules, it is important to review your Will to ensure that you make the most of the tax thresholds available.