On 6 April 2017, a major change to Inheritance Tax (IHT) law came into effect with the launch of the Residence Nil Rate Band (RNRB). Often known as the ‘family home allowance’, this is an additional IHT relief which is available when certain conditions are met. Labour had indicated an intention to abolish RNRB in their manifesto. That threat has been removed by the re-election of Boris Johnson’s government but this valuable relief is still widely misunderstood.
The RNRB currently stands at £150,000 for deaths occurring in the current tax year and it will increase by £25,000 from 6 April 2020. Much like the existing rules for the transfer of unused nil rate band between spouses and civil partners, it will be possible for spouses and civil partners to pass the unused RNRB to their surviving spouse or civil partner. By operation of the existing nil rate band (which is fixed at £325,000 until April 2021), the transferable nil rate band and the RNRB, it will be possible on the death of a surviving spouse or civil partner after 6 April 2020 to leave assets to the value of £1 million IHT free.
The RNRB is available where:-
l an individual dies on or after 6 April 2017;
l the individual owns a home, or a share of one, which is included in his or her estate for IHT purposes and has been occupied by the individual at some stage as his or her main residence; and
l the home or share of it is inherited by the individual’s descendants (such as a child, stepchild, grandchild or a spouse of any such person).
RNRB is not fully available to higher value estates. Where a deceased’s assets exceed £2 million, the RNRB will be tapered by £1 for every £2 in excess of £2 million. This means that RNRB is completely unavailable if the estate at death exceeds £2.3 million (or £2.35 million after 6 April).
There are also rules which allow individuals who have downsized or sold their homes to benefit from the RNRB. The downsizing provisions apply if:-
l an individual disposed of a former home and either downsized to a less valuable home, or ceased to own a home, after 8 July 2015;
l the former home would have qualified for the RNRB if it had been kept until death; and
l at least some of the individual’s estate is inherited by his or her descendants.
The RNRB rules should also be considered by beneficiaries of estates as they have the opportunity to enter into a Deed of Variation to redirect assets within two years of a deceased’s death and the redirection is treated for IHT purposes as having been included in the deceased’s Will. Therefore, individuals who benefit from a deceased’s estate in the event of a death after 6 April 2017 should consider whether there is any opportunity for post-death tax planning to capture the full RNRB.
The RNRB is a very valuable tax relief. If the RNRB is fully utilised on the death of a surviving spouse or civil partner in the 2020/21 tax year, the potential IHT saving would be £140,000. It is recommended that individuals review their Wills and the structure of their assets to ensure that they make maximum use of the reliefs available. However, the rules are complicated and it will be important for individuals to seek professional advice to ensure that their estates are structured in the most tax efficient way.
Despite the political uncertainty, the RNRB remains unchanged since it was brought into force on 6 April 2017. There have been criticisms of its complexity and it will be interesting to note whether any future plans arise to tackle this and streamline its use.
Andrew Paterson is a partner with Murray Beith Murray