What is it and how you might benefit?
It’s a frustrating aspect of my job that the never-ending ‘complification’ of financial rules and regulations makes it ever harder to put into plain language what it all means. So, I am starting a series of ‘Technical Notes’ in which I will attempt to explain new rules and regulations, or just existing ones that forever confuse. They won’t appear with any degree of regularity but I will fit them in with the other items we occasionally place on our website. (‘Technical Notes’ sounds very dull – and I don’t want to put you off reading them – so do please email me with suggestions for a better title.) To start the series I’m looking at the new Residence Nil Rate Band. Here goes.
First, some background. In 2007, whilst still in opposition, George Osborne proposed that the Inheritance Tax nil rate band (the first tranche of an estate that is exempt from Inheritance Tax) should increase to £1 million. It was seen at the time as a major policy announcement that began the Tory fightback and ultimately derailed Gordon Brown’s plans for a snap general election. In the end Alistair Darling took the wind out of George Osborne’s sails by introducing the transferrable nil rate band which allows couples to transfer a spouses nil rate band on their death to the surviving partner. Nevertheless the £1 million nil rate band remained an aspiration.
Ten years on the £1 million tax-free estate is nearly here, with the introduction of the Residence Nil Rate Band (RNRB) on 6th April 2017. It will be phased-in over the next four years – the £1 million figure won’t actually be here until 2020/21 – but the wind is blowing in the right direction at least.
So what is the RNRB? Simply put, it is an additional amount of an estate that will escape Inheritance Tax and it will work in tandem with the standard Nil Rate Band of £325,000. Ultimately, the RNRB will be £175,000 (it starts at £100,000 in 2017/18 rising to £175,000 in 2020/21) which together with the standard NRB of £325,000 (which will continue to be frozen until then) gives a total, per individual of £500,000, and therefore £1 million per couple. Interestingly, had the standard NRB not been frozen in 2009, but increased by 4% a year (the approximate average of previous increases) it would, by 2020/21, be just over £500,000. So these measures will put us back to where we would have been had no meddling gone on in the first place – at least for property owners…pity the life-long renters.
An estate will be entitled to the RNRB if the individual dies after 5th April 2017. The individual must have owned a home, or a share of one, so that it is included in their estate. They don’t have to have been residing in the home at the date of death but must have lived there at some time, so a never occupied buy-to-let property won’t be eligible.
The home must be inherited by direct descendants, which is defined as a child, grandchild or other lineal descendant including spouse or civil partner, widow, widower or surviving civil partner of a lineal descendant. ‘Child’ includes step, adopted or foster children. Nephews, nieces, siblings and other relatives are not included.
An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home or sold or given away their home after 7th July 2015. Property abroad will also be eligible, provided the deceased is UK domiciled and thus has their worldwide assets subject to IHT. (Non-UK domiciled individuals only pay IHT on their UK assets.)
Where the value of the home is less than the available RNRB the balance can’t be used against other estate assets, but it can be transferred to a surviving spouse or civil partner.
That’s all complicated enough, but it gets worse. The RNRB will reduce by £1 for every £2 of estate value over £2 million (a threshold that may increase in line with inflation after 2020/21). So an estate of £2,350,000 or more will have no RNRB.
Homes can be left into trust, but to qualify it must be an Absolute Trust, a Qualifying Interest in Possession Trust, a Trust for Bereaved Minors or an 18-25 Trust. Gifts into a Discretionary Will Trust will not benefit from RNRB even if the beneficiaries are limited to lineal descendants.
There are some quirks to watch out for. For example, in a will, there might be a condition that the grandchildren have to reach age 25 before they can inherit the home. If the homeowner dies before they reach this age then the RNRB won’t apply. This is because the grandchildren have not inherited the home on death.
Although welcome, the RNRB gives rise to further complexity in the world of estate planning. Should wills now be reviewed? Should lifetime gifting be considered to reduce an estate below the taper threshold? Should insurance policies already taken out to cover IHT bills now be reviewed?
I have attempted to explain the new rules but have no doubt raised further questions. We will of course take the new RNRB into account in our regular client reviews, but if you would like to discuss this with your usual planner then please do get in touch.
I mentioned above my frustration at having to explain excessively complicated rules. It is only made worse by the, frankly silly, terminology that is sometimes adopted. In this case, the legislation doesn’t call it ‘owning a home’ – you have to have a QRI, a Qualifying Residential Interest. I despair!
Philip Chandler APFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee