What is the residence nil rate band?
Inheritance tax (IHT) is charged on your death at the rate of 40% based on the value of your assets. This 40% rate is only charged on any value exceeding the nil rate band. The nil rate band (£325,000 in the tax year 2017/18) is the amount which is chargeable to IHT at the rate of 0%. With effect from 6 April 2017, an additional residence nil rate band (RNRB) applies so that less IHT may be paid when the family home is left to children, grandchildren and some other individuals.
Will my estate benefit from the RNRB?
The RNRB can be claimed on your estate if you die after 6 April 2017. Even if you die before then, your surviving spouse or civil partner may be able to carry forward RNRB to be used when they die.
Your estate will benefit from the RNRB, in addition to the main nil rate band, if you leave your interest in the family home to direct descendants, such as, children or grandchildren and some other individuals such as stepchildren or foster children, as well as the spouses or civil partners of any of these individuals (‘qualifying beneficiaries’). The RNRB could help those who inherit your assets make an additional IHT saving by increasing the part of your estate that is taxed at 0% rather than 40%. Claiming the RNRB could enable an additional £100,000 to £350,000 worth of assets to pass to the next generation without a charge to IHT.
The RNRB can be claimed if all of the following apply to you:
- You die after 6 April 2017.
- You leave an estate valued at less than an upper limit, which is initially £2m but is set to rise with inflation from 6 April 2021. The RNRB is tapered down for estates worth more than this.
- You leave your home to qualifying beneficiaries. Some trusts for qualifying beneficiaries will also qualify.
Even if you leave your home to your spouse or civil partner, rather than to children or grandchildren, the RNRB is not necessarily wasted as it can be carried forward (together with any unused main nil rate band), for the benefit of your surviving spouse or civil partner.
If your estate is worth more than £2m, you should still review your will and estate planning to see whether it is possible to arrange your affairs so that the RNRB can be claimed.
How much is the RNRB worth?
The table below shows the RNRB levels that the government has announced (which can be added to the main nil rate band to increase the amount of assets in your estate that will be taxed at 0%). The combined nil rate bands could be worth as much as £1m by 2021. These figures may change so it is important to check from time to time.
||Main nil rate band
||Combined nil rate band for both spuses or covil partners
What if I sell my home?
Under government proposals, the RNRB will still be available where you have sold your home and downsized to a less valuable property, or even if you no longer own a property, provided that you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary.
What if I move out of my home?
The RNRB will apply if you own a property that is no longer your residence when you die (for example, because you have moved into a care home), provided that it was your residence at some time during your period of ownership.
What if I have given my home to my children already?
Even if you have already given away your home to your children, if you still benefit from the property in some way without paying for it, for example, you continue to occupy it even though it has been given away or if you are co-occupying with your children after having transferred it to them, it may still be possible to claim the RNRB on your death. However, it is still advisable to review your will.
What if my children do not want my home after I die?
It does not matter whether the qualifying beneficiaries, who inherit your home, want to keep it. The RNRB will still be available even if they sell your home immediately after your death.
What if I have more than one home?
If, at your death, you own more than one property that is (or has previously been) your residence, your executors must choose which one will benefit from the RNRB.
The content of this article is for general information only. If your charity requires any advice on leasehold interests in property please get in touch with Catherine Bacon on 01223 326587 or [email protected]. Alternatively, please contact another member of Birketts' Private Client Advisory Team. Law covered as at November 2017.