From April 2017, the new inheritance residence nil rate band (RNRB) will be available for the first time when calculating the inheritance tax (IHT) liability when someone dies. Over time the estates of those couples who are able to benefit fully from the new RNRB will have an IHT ‘allowance’ of £1m, but there are a number of restrictions and traps which can prevent the RNRB from applying. Careful planning will therefore be required.
For deaths after 5 April 2017, the new RNRB is being introduced. The primary purpose of this is to allow more parents to pass on their home or some of its value to the next generation without paying inheritance tax.
It will start at £100,000, but ultimately rise to £175,000 per individual. In the correct circumstances this will be available in addition to the current nil rate band of £325,000, though this is frozen until 2019.
This will therefore mean that married couples and civil partners can potentially pass on assets worth up to £1m including the main residence to their direct descendants, without paying any UK inheritance tax.
Critical to benefiting from the relief however is that the property must be ‘closely inherited’. This requires the property to be inherited by a lineal descendant, a term which is widely defined to include persons other than blood descendants or by certain trusts for their benefit, however the RNRB will not apply where the property is left to a discretionary trust. Many wills were drafted so as to leave assets on discretionary trust so these will need to be reviewed.
Whilst in some cases the use of a discretionary trust might still be appropriate, all such wills should be reviewed.
The following additional points are important:
The RNRB will be tapered down if an estate is worth over £2m, before deduction of exemptions and reliefs.
Only one residential property will be able to benefit from the RNRB but it will be possible to nominate which property is to qualify where there is more than one residential property that could qualify.
The property must have been used as the deceased’s residence during their lifetime, so a buy to let will not qualify.
Unused available RNRB can be transferred from the first spouse/civil partner to die to their survivor in a similar way to the existing nil rate band.
The RNRB can still remain available even where the deceased ‘downsized’ to a less valuable property or indeed ceased to own a residence on or after 8 July 2015.
These new provisions are complex but they do present an opportunity for some families to reduce their IHT bills, though those who rent rather than own their own home and those without descendants will not be able to benefit.
These are some key actions for those looking to take advantage of the new ‘allowance’:
Keep records of disposals of residences made on or after 8 July 2015.
Review wills to ensure that the necessary part of the estate will be ‘closely inherited’.
Consider lifetime planning with a view to restricting the value of estates to below £2m. Here it should be borne in mind that even last minute deathbed planning might help to reduce the IHT burden even though effective lifetime planning often requires a seven year survivorship period.
