April 2017 saw some good news for those who own substantial assets, as the government introduced an additional inheritance tax relief, known as the “Residence Nil Rate Band” (“RNRB”).
These new rules allow additional inheritance tax relief on top of the existing inheritance tax “nil rate band” allowance (£325,000 per person currently) if certain criteria are met and the estate does not exceed a certain value.
The RNRB has now increased to £150,000 for deaths that take place in the 2019/20 tax year offering more tax efficiency for many.
The basic criteria for eligibility for the RNRB is that the deceased’s estate contained a qualifying residential property which is ultimately “closely inherited” by a direct descendant such as a child, adopted child, foster child, or grandchild. Even if the deceased did not own a residence when they died, it could still be possible to claim the RNRB if they owned a qualifying residence at some point between 7 July 2015 (when the RNRB was first announced) and the date of their death. Similarly, if the deceased downsized to a less valuable property between 7 July 2015 and the date of their death, it may still be possible to apply the RNRB against their former property, thus maximising the relief available. This could be particularly useful in circumstances where the current RNRB exceeds the total value of the replacement property. “Closely inherited” is a technical term but it covers a situation where the descendant inherits the property (or inherits an estate containing the property) outright, and not subject to a trust (although the RNRB will still apply in relation to certain trusts).
In addition, assuming the criteria are met, the RNRB from a previously deceased spouse can also be transferred over to the surviving spouse’s estate to be used on the second death. This works in much the same way as the transferrable “nil rate band” allowance, thereby ‘doubling up’ the relief available. It is worth pointing out that the first spouse need not have died since the RNRB was introduced in order for their unused RNRB to be transferred to the surviving spouse’s estate. Both spouses will also benefit from any increase in the RNRB, as it is the RNRB in force at the date of the second death that is relevant for these purposes.
The RNRB is a useful inheritance tax relief that could result in a reduction in the tax payable (or, for some, might result in there being no inheritance tax to pay). However the rules governing the application of the RNRB are complex and can be difficult for people to navigate.
If you are a personal representative administering someone’s estate and you think the RNRB might apply, it’s important to take professional advice to ensure you are applying the RNRB (and any transferrable RNRB) correctly, and obtaining the maximum relief for the benefit of the ultimate beneficiaries.
Equally, if your own estate is worth more than £325,000 (or, if you are married and your combined estates are worth more than £650,000) inheritance tax may be a consideration. In order to maximise inheritance tax efficiency, it is advisable that you: a) ensure that your Wills are kept under review; and b) undertake inheritance tax planning advice.
If you have any questions or queries regarding the above or another private client issue please don’t hesitate to contact Charlotte Thomas, Senior Associate Solicitor by telephone on 01737 854 564 or by email at [email protected].