The announcement in the summer 2015 Budget of a £1 million inheritance tax (IHT) threshold for couples was understandably welcomed, having seen the IHT nil rate band frozen at £325,000 since 6 April 2009. As is usually the case with these types of announcements, all was not quite what it seemed.
Rather than increasing the existing nil rate band to £500,000 per person, the government decided to somewhat complicate matters by the introduction of an additional nil rate band - the ‘Residence Nil Rate Band’ (RNRB) - which comes into effect for deaths on or after 6 April 2017.
The RNRB is set at £100,000 in 2017/18, rising in £25,000 increments until 2020/21 and thereafter will increase in line with the Consumer Price Index.
There are unsurprisingly a number of conditions that require to be met in order to qualify for the RNRB. A summary of those are as follows:
- The RNRB is only available where the deceased’s residence is inherited by direct descendants.
- The definition of direct descendants is quite wide and includes children, step-children, adopted children, foster children, grandchildren and great grandchildren.
- Direct descendants do not include parents, siblings, nephews/nieces or other relatives not listed above.
- To inherit is to either become absolutely entitled to or be beneficially entitled to an interest in possession of the property.
- Although the RNRB has also been referred to as the main residence nil rate band, reference to this should be avoided as this is strictly speaking incorrect. For a property to qualify under the RNRB legislation, it is sufficient for the property to have been a residence (ie. not necessarily a main residence) of the deceased at some point.
Where a net estate exceeds £2 million, the RNRB is tapered at a rate of £1 for every £2 over £2 million. Net estate is defined as estate after debts and liabilities but before exemptions and reliefs. Clients whose estates are worth over £2 million should consider ways to reduce their estates prior to death as the RNRB only applies to estate on death and does not take lifetime gifts into account.
There are a number of planning opportunities available to the client to ensure that the RNRB is either fully utilised or transferred on first death. These opportunities include the use of trusts, however, careful consideration must be given to the particular type of trust created to ensure it not only utilises or maintains the RNRB, but that it delivers where the client ultimately wants his or her estate to go to.
Further legislation was introduced in 2016 which dealt with circumstances in which the RNRB is still available where an individual either downsized or ceased to have a residence at all (if for example, they have moved into residential care) on or after 8 July 2015. This additional amount of RNRB is known as the ‘downsizing addition’.
The downsizing legislation is extremely complex and advice should always be sought if this is or will be relevant to a client’s circumstances.