Whilst the nil rate band (inheritance tax threshold) will stay at £325,000 until April 2021 (Finance (No 2) Act 2015, s 10), the recent introduction of the Residence Nil Rate Band (RNRB) gives an additional allowance where a property is inherited by a ‘direct descendant’. The property will be treated as being inherited if, per section 8J(2), there is a disposition on death effected by a Will, the intestacy rules or otherwise.
The RNRB was created through new provisions inserted into the Inheritance Tax Act 1984 (ss 8D–8M) and will be introduced gradually.
How much is the RNRB?
For the 2021 tax year there is a potential £175,000 extra to pass on to future generations. The rates for years leading up to this final figure are:
For deaths in the following tax years it will be:
- £125,000 in the current 2018 to 2019 tax year
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
Where an estate is worth more than £2 million, the RNRB will be reduced by £1 for each £2 over the £2 million threshold.
The amount of RNRB is naturally capped at the value of the residence/interest in the residence in question, and there is a limit of one property.
Who can claim the RNRB?
The RNRB is only available where you pass on a residence or an interest in a residence to:
- Your lineal descendant
- Your lineal descendant’s spouse or civil partner
- The widow, widower or surviving civil partner of your lineal descendant if they predeceased the deceased, unless they have remarried or entered into a new civil partnership.
If the Deceased did not leave their property to a lineal decedent (or other qualifying person, as above) it is possible to complete a post death variation provided all the current beneficiaries agree. The effect of this is to ‘read back’ the gift to the lineal decedent, as if this is what was written in their Will.
What about a property left in trust (a settlement)?
Sometimes (but not often) trust property can be eligible for the RNRB – for example, where:
- The settlement allows for an immediate post death interest (s.49 Inheritance Tax Act 1984)
- The settlement is for a disabled person (s.89 or s.89B Inheritance Tax Act 1984) or
- The settlement is for a ‘bereaved minor’ or ‘bereaved young person’ (s.71A or s.71D Inheritance Tax Act 1984)
However of note, a discretionary settlement is not eligible – even if all of the beneficiaries are lineal descendants or other qualifying people as above. Note that also common grandparent’s settlements expressed to be conditional upon the grandchildren attaining a particular age will not be eligible.
If property has been left in a trust that is not eligible, the solution is to make an appointment from the trust property (s.144 Inheritance Tax Act 1984) within a 2 year period, appointing an immediate post death interest in the trust property to a lineal descendant or qualifying person as above. In this way the trustees can secure the Residence Nil rate Band. Note that, as far as the author knows, there is no reason why they cannot appoint to the value of the RNRB only, leaving the remaining property in trust.
What property counts?
The property must be a ‘residence’ and this is defined at Section 8H of the Inheritance Tax Act 1984 as a dwelling which has been the deceased’s residence at some time during his period of ownership. So, of note:
- It only needs to have been the Deceased’s residence at some point.
- It does not have to have been the Deceased’s main residence – a holiday home can be eligible.
- It does not have to be property in the UK.
- A buy to let property is not eligible.
What if I want to downsize?
With a generous allowance available for passing on high value property, you might be forgiven for wondering why anyone would want to downsize and lose their ability to claim the RNRB. Fortunately this is something the Government considered and the Finance (No 2) Act 2016 introduces into the Inheritance Tax Act 1984 what is in effect a downsizing allowance.
Where a person disposes completely of property or moves to a less valuable property on or after 8th July 2015, the downsizing allowance can be claimed, calculated as the amount lost. This is limited to the value of assets left to lineal descents – so if A sells their £125,000 house and buys a £50,000 flat, their estate can claim the RNRB in relation to the £75,000 surplus cash, in addition to claiming in relation to the £50,000 flat: provided that A leaves both to lineal descendants. If A leaves the flat to lineal descendants but not the cash, the estate can only claim in relation to the value of the flat.
HMRC’s Inheritance Tax Manual provides more information on downsizing.
Is the RNRB transferable?
Like your standard nil rate band (inheritance tax threshold) of £325,000, your spouse or civil partner will benefit from an uplift in percentage of their RNRB equivalent to what you did not use on death. So if you die, leaving all your property to your spouse, this will qualify for the spouse exemption and no inheritance tax will be payable. This means 100% of your nil rate band and 100% of your RNRB goes unused. If your spouse were to die in the 2020/2021 tax year (when the RNRB will be £175,000) their own allowances would be £325,000 (nil rate band) plus £175,000 (RNRB). Because you didn’t use 100% of your nil rate band or 100% of your RNRB, they will benefit from a 100% uplift to both, giving them a total of £1 million to pass on tax free – assuming the value of the family home is £350,000 (the maximum RNRB allowance from both of you) and is to be passed to lineal descendants. Note that it doesn’t matter that the RNRB is currently £125,000 for this tax year. The uplift for the unused portion will always be a percentage uplift rather than an uplift of the actual unused amount.
You can find out more about protecting your assets at www.aprilking.co.uk.
