When is a million pounds not a million pounds? The new residence nil-rate band

28 March 2017

The inheritance tax rules are changing.

From 6 April 2017, there will be a new residence nil-rate band (RNRB), but not every estate will be able to claim it, so it is worth finding out whether it will apply to you.

The Office for Budget Responsibility estimated that 45,100 families will have to pay inheritance tax in the current tax year, an increase of over 12% on the previous year. Hopefully this will be lessened going forward by the new RNRB.

When will the RNRB apply?

The RNRB will apply to an estate where a person leaves his/her home, or a share of it, to direct descendants, such as such as children, step-children or grandchildren.

The RNRB rules do not benefit you if you do not have children or if you wish to leave your home to other relatives.

You should review your Will to check how direct descendants inherit as only certain types of trust for children and grandchildren qualify.

The RNRB will be £100,000 in 2017/2018, £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.

From 2021/22 it will increase in line with the Consumer Prices Index.

The RNRB will be in addition to the existing nil-rate band (NRB), currently £325,000.

So where does the £1m figure come from?

For married couples or civil partners, any unused NRB and RNRB can be transferred to the surviving spouse’s estate.

So the surviving spouse’s estate could benefit from a total RNRB of £350,000 (£175,000 x 2) in 2020/21, in addition to a total NRB of £650,000 (£325,000 x 2), so £1 million before IHT becomes payable.

Your home

For the RNRB to apply, the home must be included in your estate on death and you must have lived there at some stage during your life. A property that you never lived in, such as a buy-to-let will not qualify.

The value of the home for RNRB purposes will be the open market value less any liabilities secured on it, such as a mortgage.

There are special provisions to cover the position where you downsize or no longer own a home at your death.

Tapering away

If a person’s estate exceeds £2 million, the RNRB is reduced by £1 for every £2 above the threshold.

So for example Ethel, a divorcee, dies in 2020/21 with an estate worth £2.3 million, including a home worth £200,000.

The RNRB in 2020/21 is £175,000. Her estate exceeds the taper threshold of £2 million by £300,000, so the RNRB is tapered by £1 for each £2 that it exceeds the taper threshold.

The RNRB is reduced by £150,000, meaning that only £25,000 of RNRB is available. If Ethel’s estate was £2.35 million or more, the RNRB would be tapered away completely.

Your Will

Don’t forget, your situation may not be the same as Ethel’s.

What better time to assess your Will and financial plans to gauge the tax implications on your estate?

Find a professional advisor to help you with your Will.

Alison Craggs, associate for and on behalf of Blake Morgan LLP