What will you be leaving behind for loved ones when you die?

Whether it’s good memories, property or money; one thing you shouldn’t risk, is passing on a large Inheritance Tax (IHT) bill.

Inheritance Tax is paid on the value of estates over £325,000. However, the Residential Nil Rate Band (RNRB) means that a portion of the value of their property can be passed to the homeowner’s beneficiaries.

The RNRB is relatively new, having only been introduced in 2017, and isn’t widely understood. So, we thought we’d explain the basics to you. Of course, if you want more detail, or advice on your specific circumstances, please don’t hesitate to get in touch with us.

What is the Residential Nil Rate Band?

The RNRB was introduced to reduce the general IHT burden and specifically to make it easier to pass on the family home without incurring a tax bill.

It affects individuals with an estate, including their main residence, valued at above the IHT threshold of £325,000 and provides an additional nil-rate band. In the current, 2018/19 tax year, the extra band will be £125,000, which will increase by £25,000 each year until 2020/21, when it will reach £175,000. It will then rise in line with the Consumer Prices Index (CPI).

However, for larger estates the RNRB will be reduced, or ‘tapered’ by £1 for every £2 over a net value of £2 million. However. if your estate is affected by the taper (i.e. it is worth over £2 million) it is possible to gift away assets and reduce your estate to below the threshold, allowing you to benefit from the full RNRB.

In common with the main IHT band of £325,000 any unused RNRB can be transferred to a surviving spouse or civil partner.

For the RNRB to be available, additional criteria must be met:

  • It is only available to people who held a ‘qualifying residential interest’ at some period during their life. In, practice this means that they must have owned, or part owned, a property which was their residence at some point during the period they owned it.
  • The RNRB can not be used in connection with investment or Buy to Let properties.
  • If the deceased has two ‘qualifying residential interests’ the executors of the estate can elect which property will use the RNRB.
  • To use the RNRB the property must be passed to direct descendants, namely a child, grandchild or other lineal descendant. A husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner) also qualify, as would step-children, adopted children, children who have been fostered or children where the deceased has been appointed as a guardian or special guardian when the child is under 18.
  • The definition of direct descendant doesn’t include nephews, nieces, siblings and other relatives not included above.
  • When calculating the RNRB it is the net value which is used; to calculate this the amount outstanding on any mortgages, including equity release, is deducted from the value of the property.
  • If the deceased has no direct descendants, the RNRB cannot be used.

Examples

A single person

A divorcee, Mr F dies in May 2018 with an estate worth £400,000, included in which is his home with a net value of £100,000.

In his will Mr F leaves his entire estate, including the home to his two sons.

The RNRB must always be considered first; as Mr F’s property is worth £25,000 less than the RNRB it is immediately exempt from IHT. The remaining estate of £300,000, is less than the £325,000 IHT threshold, therefore no tax is due.

A married couple

John dies in June 2017 leaving a wife, Jane, and their daughter, Emma who is 30. The home in which John and Jane lived was valued at £400,000 at the time of John’s death, while other assets, including savings and investments amount to £1 million. All of these, as well as their home, was owned jointly.

The spousal exemption applies meaning that ownership of the family home and other assets passes to Jane without any IHT being due and John’s nil rate band and RNRB are unused.

Three years later, in July 2020, Jane dies and leaves her estate her daughter, Emma. However, the house is now worth £600,000, while other assets have fallen in value to £800,000. The total estate is therefore worth £1.4 million.

Jane’s executors have her standard NRB of £325,000 and as she owns a qualifying residential interest on death, the RNRB is also available to use against her estate. Furthermore, as John left everything to Jane, his unused RNRB and standard nil rate band can also be claimed.

Jane’s estate can therefore benefit from a total of £1 million in nil rate bands; £650,000 being the total of two standard nil rate bands and £350,000 from two RNRBs.

After deducting the £1 million in available nil rate bands the residual value of the estate is £400,000 on which tax is payable at a rate of 40%, resulting in a liability of £160,000. Emma will therefore inherit a total of £1.24 million, less any other costs for administering her mother’s estate.

Using the RNRB on previous properties

Many people assume that the RNRB can only be applied to properties which are owned at the time of death, but that is not always the case. If certain criteria are met, the RNRB can apply to a home which has been sold to downsize or move into a care home. These are:

  • The property must have been eligible for RNRB had it remained part of the estate until death.
  • The home must have been sold or given up to buy a less valuable property or to move into a care home or rented accommodation, losing some or all the RNRB.
  • The sale must have happened on or after 8th July 2015.
  • The value of assets passed on to direct descendants must be equal to, or higher than, the value of the property.

The RNRB as part of estate planning

Planning what will happen to your belongings, money and assets when you die should form an important part of your overall financial plan. Furthermore, steps should be taken to understand the potential value of your estate and therefore the likely IHT burden on your death.

Estate planning can be complex, with a myriad of allowances and restrictions. Planning ahead is essential, which is where working with a financial planner, such as ourselves can help maximise the amount left to your loved ones and minimise the tax paid.

For more information on the Residential Nil Rate Band, or estate planning in general, please get in touch with us on 01664 77 88 99.