The new Residence Nil Rate Band (RNRB) comes into effect this April, supposedly meaning you can now plan to hand down your family home with either a zero tax bill or a significantly reduced one than the current inheritance tax (IHT) rules permit.
Sadly, in true Government fashion, nothing is quite as simple as it seems, and there are a multitude of complexities and restrictions to how this will work in practice…
In simple terms, the RNRB means that the current IHT threshold of £325,000 for a single person and £650,000 for a married couple or civil partnership will increase by £100,000 per person from 6th April 2017. The rate will increase year-on-year by £25,000 until it reaches £175,000 per person from 6th April 2020, continuing thereafter in line with inflation.
However, it is important to understand when and where it can – or can’t – be applied. There are three key criteria that must be met:
- the property must form part of the deceased’s estate;
- he or she must have lived in it at some point – there is no minimum period in which they must have lived in it, but this rules out buy-to-let properties for example; and
- the property or a share of it must be passed to “direct descendants”
For those with children of their own, this is simple – it includes their children (natural & adopted), grandchildren and subsequent bloodline. However, strangely compared with the normal legal definition, in this respect “direct descendant” is not limited to bloodline, and also includes step-children, foster children, or any child that the deceased had been appointed guardian of, even if they are now over the age of 18.
Stranger still, the net has been widened even further to the spouses & civil partners of these descendants – even if the descendant themselves has died. However, it specifically excludes other family members; such as siblings, nephews or nieces of the deceased. Hence, anyone without children (of any type) will not get to benefit from this additional RNRB.
The new RNRB is only applicable for deaths on or after 6th April 2017. The rate is, however, transferable between married couples and civil partners, and even if one partner has already died prior to the RNRB coming in, their unused RNRB will transfer to the surviving partner.
Another significant restriction is that the value of RNRB tapers away where the property is worth more than £2 million – by £1 reduction for every £2 over £2 million. So, for an individual with “direct descendants” whose estate is worth over £2,350,000 there will be no RNRB available, likewise for a couple whose estate is over £2,700,000.
There are various other complications to consider with the RNRB, – for example, where the deceased sold their property prior to their death to downsize or gave it away and continued to live in it, they must have done this after 7th July 2015 to qualify.
It also becomes increasingly complex as to whether the RNRB will apply where Trusts are involved in Wills, as some Trust provisions will qualify, where others won’t.
What does this mean for you…? Simply that it’s important to review the provisions you have in place now, in light of the incoming RNRB, to ensure if your estate is entitled, you do not lose out due to how your Will was previously structured.
Heir Tight Wills helps clients put in place robust provisions and valid documents, to maximise the tax efficiencies, and protect their loved ones and their assets both during their lifetime and after their death. For a FREE Consultation to discuss writing or updating your Will & estate planning provisions, contact Rachael Rodgers on 0845 519 7585, or CONTACT US via email.