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Could you be missing out on the £175,000 Residence Nil Rate Band?
The Residence Nil Rate Band (RNRB) was introduced in April 2017 to enable families to leave, on their death, more of their estate to direct descendants without having to pay Inheritance Tax. With the amount about to rise once more in the coming tax year 2020/21, William Ware, Consultant in our Private Client team, here explains why it is important that families understand their rights regarding the RNRB, and why it can make all the difference when your home is registered jointly with your spouse or civil partner.
What is the Residence Nil Rate Band (RNRB)?
When a person dies, their estate could be liable to Inheritance Tax (IHT). While this is dependent on numerous factors, generally if the estate is worth under £325,000 there will be no IHT due. For estates over this amount, the additional figure will be taxed at 40%. This assumes that no lifetime gifts have been made in the previous 7 years. In the case of a married couple (or civil partner), in circumstances where the first spouse to die leaves his or her estate to the surviving spouse, then on the death of the surviving spouse, their estate will have the benefit of two nil rate bands of £325,000, bringing the total value of the taxable estate benefiting from the zero rate of IHT to £650,000.
However, when the RNRB was introduced in April 2017, this added as additional £100,000 to the £325,000 as long as certain criteria are met:
- The person died on or after 6th April 2017.
- The person owned the home, or a share of the home, that is included in the estate.
- The person occupied the property at some stage as their main residence.
- The beneficiaries of the home, or a share of the home, are direct descendants of the deceased, such as children or grandchildren, as well as adopted, foster and step children.
- The value of the estate is not worth more than £2million.
The £100,000 has increased each year since 2017 and from 6th April 2020 will increase to £175,000 for individuals (or £350,000 for couples where the first to die leaves everything to the surviving spouse), meaning that an individual could have an estate of £500,000 before any IHT is due.
Property ownership and Residence Nil Rate Band
One of the criteria to qualify for RNRB is that the individual must own the home, or a share of it. This is why it is vital that your home is registered jointly with your spouse or civil partner and not solely in one of your names. If one spouse does not own a share in the home and dies, they will have no RNRB to transfer over.
The RNRB available is the maximum amount for individuals and couples; if there is any unused following the death of one party, then this can be transferred to the other party. For example, upon the death of a wife, she gifts 50% of her share in the family home to her children. This share is valued at £150,000, meaning the £25,000 that is not used can be transferred to her widower.
There are two ways in which you can own the property jointly:
- Joint tenancy – in this situation, you and your spouse would both own the whole of the property. When one of you dies, their share would automatically pass to the surviving party; it cannot be passed to anyone else in their Will. As joint tenants, IHT is not applicable upon the first death due to the spouse exemption. The unused RNRB of £500,000 could then be transferred to the surviving spouse with a total of £1million RNRB available upon their death.
- Tenants in common – parties own separate shares of the property which can be different percentages, i.e., they could own either 50% each or one party owns 25% and the other 75%. The property can be left to who they wish in their Will, and so RNRB could be available upon both the first and second deaths, as long as the criteria of lineal descendants are met.
The RNRB could still be available even if you have downsized. If you have needed to move into residential care for example and disposed of your property to do so, the RNRB would still be available if the property would have qualified when you did own it, your current property and/or assets form a part of your estate which is passing to your direct descendants, and you downsized or sold the property after 8th July 2015.
If there is more than one property within your estate, it will be the responsibility of your Personal Representatives to decide which property will be used for the RNRB, as only one can qualify.
William concludes, “The legalities surrounding the Residence Nil Rate Band and Inheritance Tax in general are complicated, and will be determined by your own personal situation. There are other exceptions to when RNRB will apply, for example if your estate is valued at over £2.3million or if you are using a discretionary Trust Will for the benefit of your children’s future inheritance. Another unfortunate disqualifier is if you leave the estate, for example, to grandchildren subject to an age contingency of say 21; if at the date of death the grandchildren have not met that age then the “Trust” status removes the eligibility for the RNRB relief. There are certain Trusts which will retain the RNRB, so receiving the right estate planning advice early is key when making arrangements for your future to ensure that you receive the reliefs available to you and your family, but also reduce the risk of going over the threshold and IHT being due. We would always recommend that you keep your Wills and estate planning under constant review, not just for changes in your family arrangements, for example any divorces, marriages, bankruptcies etc, but also for changes in legislation.”
To discuss your plans for your estate in the future with William, you can contact him today on 01329 222075 or email williamware@warnergoodman.co.uk. Alternatively, you may find the following resources useful:
ENDS
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.