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With effect from 5th April 2017, a new Inheritance Tax relief known as the residence nil rate band (RNRB) came into force which is in addition to the basic Inheritance Tax nil rate band (NRB) already available to individuals.
What is the RNRB?
Also known as the “Family Home Allowance”, the RNRB allows an individual to pass on a property which has once been lived in as a residence to their direct descendants. The RNRB will be phased in over four years; starting at £100,000 in 2017/18, rising £25,000 per year to reach £175,000 by 2020/21.
The RNRB is limited by the value of the residence, and any agricultural or Business Property Relief is deducted before calculation, as are any debts or charges on the residence.
What property qualifies?
Only one residential property will qualify for the RNRB which your personal representatives can choose in order to maximise the allowance.
You must have lived in the property as a resident at some point for it to qualify. Buy to let property that has always been rented out will not be eligible to benefit from the allowance although second homes (both at home or abroad) will be eligible to benefit.
Who is a direct descendent?
The RNRB is only available on property being passed to “direct descendants” which includes children and grandchildren, as well as step-children, adopted and foster children. In order for the relief to qualify the direct descendent must become absolutely entitled to the property. Therefore, you cannot impose an age contingency greater than 18 for the RNRB to be available.
Brothers, sisters, nieces, nephews and other relatives are not eligible to benefit from the RNRB even if there are no direct descendants to pass the property to.
When can the RNRB be transferred?
The RNRB is transferrable between spouses and civil partners on death, just like the standard NRB. It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on second death provided that the second spouse or civil partner dies after 5th April 2017.
The amount of the transferrable RNRB is capped at an additional 100% of a surviving spouse’s available RNRB. However, subject to that maximum, more than one predeceased spouse’s RNRB can be transferred. As with the NRB, it is the unused percentage of the RNRB that is transferrable, not the unused amount.
Tapering the residence nil rate band
Individuals or couples with large estates may not see any benefit from the RNRB as it is reduced by £1 for every £2 that the deceased’s net estate exceeds £2M (“the taper threshold”). This means that there will be no RNRB available if the deceased holds assets of more than £2.2M in 2017/18 rising to assets of £2.35M in 2021/22 when the full £175,000 RNRB allowance becomes available (£2.7M for a surviving spouse).
Relief such as Business Property and Agricultural Property Relief are ignored when calculating the value of the deceased’s estate for the purposes of ascertaining the taper threshold as are any absolute lifetime gifts which are not subject to the gift of reservation rules.
What if the Residence passes to a discretionary Trust?
The RNRB may be lost if the residence passes to a discretionary Trust for the benefit of the deceased’s spouse, children or grandchildren. This is because the beneficiaries are not treated as an absolute owner of the property.
However, under Section 144 Inheritance Tax Act 1954 the Trustees can within two years of the deceased’s death, either appoint the residence to a spouse or direct descendent absolutely or confer upon them an immediate post death interest which for Inheritance Tax purposes will be read back to the date of death thus enabling the RNRB to be claimed.
If the residence passes to a Trust which gives the deceased’s spouse or their direct descendants an immediate post death interest, the RNRB will still be available as the beneficiary is deemed to own the asset.
The use of a Trust can still be beneficial on the death of the first spouse as provided the Trustees create an immediate post death interest for the benefit of the surviving spouse within two years of the first death, the RNRB can be transferred to the surviving spouse’s estate without the value of the first spouse’s assets forming part of the surviving spouse’s estate for the purpose of calculating the value of their estate for the taper threshold.
If an individual has a qualifying interest in possession in settled property then this will form part of their estate for Inheritance Tax purposes and the RNRB will be available provided the property is closely inherited. However, the RNRB will not apply if the property passes to a succeeding interest in possession.
The RNRB will not apply to residential property held within a lifetime discretionary Trust because the asset is not within the deceased’s estate on death.
The residence does not need to be owned at death to qualify. These rules are an attempt to stop individuals losing the benefit of the RNRB when they downsize due to age or circumstances.
To qualify, three conditions must be met:-
1. The individual disposed of the residence and either downsized to a less valuable home, or ceased to own one, on or after 8th July 2015;
2. The former residence would have qualified for the RNRB had it been kept until death; and
3. The replacement property and/or assets form part of the deceased’s estate and pass to the deceased’s direct descendants.
The amount of the downsizing allowance cannot exceed the RNRB that would have otherwise been available and the claim must be made by the deceased’s Personal Representatives within two years of the end of the month of the individual’s death. To rely on the downsizing provisions, careful records must be kept of the proceeds of sale (or of the residence value at the date of a gift) so that the “lost” RNRB can be ascertained. If the disposal included a gift, it would be advisable to obtain a valuation at the time of transfer.
The new RNRB rules are hugely – and one might say unnecessarily – complicated and there are many pitfalls that need to be avoided. It makes sense to keep Wills constantly under review for changing circumstances.
For more information, please contact Susannah Griffiths, Christopher Hamlyn or James Rousell on 01384 371622
Please note that the information contained herein is for information purposes only and does not constitute advice.