Barry Shaw delves into the detail of the new residence nil rate band and gives his suggestions for how to take advantage of it.
There has been much recent excitement about the new residence nil rate band (RNRB)affecting residential property that came into force in April, with headlines claiming it heralded an overall £1m nil rate band (NRB) for inheritance tax (IHT).
The NRB is the threshold of an estate below which no IHT is payable, provided no lifetime gifts have been made within the last seven years before death. This has been fixed at £325,000 for each individual since 2009 and will remain at that level until at least April 2021/2022. Above that threshold, IHT is payable at 40%. There is no IHT on assets passing from one spouse or civil partner to the other and the unused NRB of the first spouse or civil partner to die has been capable of being carried forward to the survivor’s estate since 2007.
What is the RNRB?
The RNRB is a new additional NRB that applies to somebody who on their death leaves a residence (or a share in a residence) to a direct descendant. This may have a significant effect both on estate planning and the treatment of residential property (including, potentially, investment property). The unused RNRB of the first partner to die may be carried forward to the survivor, even if they died before its introduction in April 2017, so the whole of that partner’s RNRB will be available on the second death.
The maximum additional RNRB in the current tax year is £100,000 (net of any mortgage), rising to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. It will then be index-linked. The £1m figure will apply only when the new relief comes fully into effect in the tax year 2020/21 and where the full NRB and RNRB of the first spouse or civil partner to die is carried forward to the survivor. The additional relief applies as follows:
The RNRB applies to a testator who owns (or owned) a residence (ie a residential property in which he or she has lived at some point – not necessarily immediately before death) which is left to a direct descendant in his/her will (or under an intestacy) to direct descendants, ie children or grandchildren, including stepchildren, adopted children and foster children (and their spouses or civil partners). It does not therefore apply if the property is left to a sibling or any other relative. The residence need not have been a main or principal residence, nor must it be within the UK. It must, however, be part of that person’s estate for IHT purposes.
Relief is limited to £100,000, so if the deceased owned a residence worth £200,000, the relief is capped at £100,000; if the residence is worth £80,000, then £20,000 of the relief will remain unused.
The unused RNRB of a deceased spouse or civil partner may be carried forward and used by the survivor (in addition to his/her own RNRB).
There is a tapering restriction, whereby the RNRB is reduced by £1 for every £2 by which the estate exceeds £2m. Therefore, if an estate exceeds £2.2m, the relief is extinguished altogether.
To avoid these rules discouraging downsizing, a former residence disposed of on or after 7 July 2015 that would otherwise have qualified for the RNRB will still qualify, as if it had been kept until the date of death, provided the testator leaves other assets equivalent to its sale value to direct descendants. So, if the deceased downsized from a residence worth more than the maximum RNRB to one worth less than the maximum RNRB available at the date of death, the maximum relief will still be available.
How to take advantage of it
The following are examples of how an individual might arrange their property holdings to take full advantage of the RNRB:
An individual owns a residence and an investment property, both of which are below the RNRB threshold. They could sell both and purchase a more expensive residence that takes full advantage of the RNRB and (if any funds still remain) a cheaper investment property.
Although the unused RNRB of the first spouse or civil partner to die may be carried forward (see above), there is a danger that if the entire first estate is left to the survivor, the combined estate on the second death will exceed £2m, whereupon the tapering relief will apply (or will be extinguished altogether if the combined estate exceeds £2.2m). In that case, steps should be taken to avoid the combined estates exceeding £2m on the second death. Note that if the estate on the second death exceeds £2.2m, the RNRB of both spouses or civil partners will be lost.
Somebody who owns an investment property, but does not own a residence in this country (eg, because they live abroad most of the time) could reside in the investment property for a short period (eg, between tenants) so that the property qualifies for an RNRB on the investor’s death. No minimum period has been stipulated for how long somebody has to reside in a property for it to qualify.
If somebody owns two homes, they can nominate which is their residence for the purpose of the RNRB, similar to the capital gains tax election, giving further scope to maximise the relief.
As a matter of social policy, the RNRB has been much criticised as it will not benefit anybody who either does not have any children or does not own their own house. Those categories of tax payer are therefore prejudiced unfairly, in favour of those who do qualify and are able to take advantage of the new relief.
Barry Shaw is a partner at Wallace LLP
Main image: Dinendra Haria/Rex/Shutterstock
Barry Shaw delves into the detail of the new residence nil rate band and gives his suggestions for how to take advantage of it.
There has been much recent excitement about the new residence nil rate band (RNRB)affecting residential property that came into force in April, with headlines claiming it heralded an overall £1m nil rate band (NRB) for inheritance tax (IHT).
The NRB is the threshold of an estate below which no IHT is payable, provided no lifetime gifts have been made within the last seven years before death. This has been fixed at £325,000 for each individual since 2009 and will remain at that level until at least April 2021/2022. Above that threshold, IHT is payable at 40%. There is no IHT on assets passing from one spouse or civil partner to the other and the unused NRB of the first spouse or civil partner to die has been capable of being carried forward to the survivor’s estate since 2007.
What is the RNRB?
The RNRB is a new additional NRB that applies to somebody who on their death leaves a residence (or a share in a residence) to a direct descendant. This may have a significant effect both on estate planning and the treatment of residential property (including, potentially, investment property). The unused RNRB of the first partner to die may be carried forward to the survivor, even if they died before its introduction in April 2017, so the whole of that partner’s RNRB will be available on the second death.
The maximum additional RNRB in the current tax year is £100,000 (net of any mortgage), rising to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. It will then be index-linked. The £1m figure will apply only when the new relief comes fully into effect in the tax year 2020/21 and where the full NRB and RNRB of the first spouse or civil partner to die is carried forward to the survivor. The additional relief applies as follows:
The RNRB applies to a testator who owns (or owned) a residence (ie a residential property in which he or she has lived at some point – not necessarily immediately before death) which is left to a direct descendant in his/her will (or under an intestacy) to direct descendants, ie children or grandchildren, including stepchildren, adopted children and foster children (and their spouses or civil partners). It does not therefore apply if the property is left to a sibling or any other relative. The residence need not have been a main or principal residence, nor must it be within the UK. It must, however, be part of that person’s estate for IHT purposes.
Relief is limited to £100,000, so if the deceased owned a residence worth £200,000, the relief is capped at £100,000; if the residence is worth £80,000, then £20,000 of the relief will remain unused.
The unused RNRB of a deceased spouse or civil partner may be carried forward and used by the survivor (in addition to his/her own RNRB).
There is a tapering restriction, whereby the RNRB is reduced by £1 for every £2 by which the estate exceeds £2m. Therefore, if an estate exceeds £2.2m, the relief is extinguished altogether.
To avoid these rules discouraging downsizing, a former residence disposed of on or after 7 July 2015 that would otherwise have qualified for the RNRB will still qualify, as if it had been kept until the date of death, provided the testator leaves other assets equivalent to its sale value to direct descendants. So, if the deceased downsized from a residence worth more than the maximum RNRB to one worth less than the maximum RNRB available at the date of death, the maximum relief will still be available.
How to take advantage of it
The following are examples of how an individual might arrange their property holdings to take full advantage of the RNRB:
An individual owns a residence and an investment property, both of which are below the RNRB threshold. They could sell both and purchase a more expensive residence that takes full advantage of the RNRB and (if any funds still remain) a cheaper investment property.
Although the unused RNRB of the first spouse or civil partner to die may be carried forward (see above), there is a danger that if the entire first estate is left to the survivor, the combined estate on the second death will exceed £2m, whereupon the tapering relief will apply (or will be extinguished altogether if the combined estate exceeds £2.2m). In that case, steps should be taken to avoid the combined estates exceeding £2m on the second death. Note that if the estate on the second death exceeds £2.2m, the RNRB of both spouses or civil partners will be lost.
Somebody who owns an investment property, but does not own a residence in this country (eg, because they live abroad most of the time) could reside in the investment property for a short period (eg, between tenants) so that the property qualifies for an RNRB on the investor’s death. No minimum period has been stipulated for how long somebody has to reside in a property for it to qualify.
If somebody owns two homes, they can nominate which is their residence for the purpose of the RNRB, similar to the capital gains tax election, giving further scope to maximise the relief.
As a matter of social policy, the RNRB has been much criticised as it will not benefit anybody who either does not have any children or does not own their own house. Those categories of tax payer are therefore prejudiced unfairly, in favour of those who do qualify and are able to take advantage of the new relief.
Barry Shaw is a partner at Wallace LLP
Main image: Dinendra Haria/Rex/Shutterstock
