Back in April 2017 the government introduced the new Residence Nil Rate Band (RNRB) with the headline statement claiming that the inheritance tax limit was now going to be £1 million. These dramatic claims were not completely correct and certainly over simplified the complexity of this new piece of legislation. However, for some it has greatly changed the inheritance tax position for their estate and has altered the advice that lawyers provide in respect of Will drafting and estate planning.
The RNRB is an additional inheritance tax allowance that applies to an estate where the family home is left to direct lineal descendants. These include children, grandchildren, foster children and step children. Frustratingly, if you do not have any direct lineal descendants, this allowance will not apply to your estate.
The additional allowance is currently at a maximum of £175,000 per person. As it is linked to your main residence, if your share in your home is less than your RNRB allowance, then the remaining allowance would not be available. Please also note that the RNRB is tapered if your estate exceeds £2million.
Potential allowance of £1 million for a married couple
The RNRB, together with the existing Nil Rate Band (NRB), will give each individual a potential tax free allowance of £500,000 (£325,000 – NRB and £175,000 – RNRB).
When a spouse or civil partner dies and does not use their full NRB or RNRB, the unused percentage of those allowances can be transferred to the estate of their surviving spouse or civil partner. This means that a couple who are married or in civil partnership will have a potential combined tax free allowance of £1 million. This is provided that they own a property worth at least £350,000, which they leave to their direct lineal descendants and their estate does not exceed £2million. Please note that if someone has sold, given away or downsized to a less valuable home before they die their estate may still be able to claim the RNRB if they qualify under the downsizing provisions.
Potential double taxation for cohabiting couples
The transferable allowances do not apply to cohabiting, unmarried couples. Additionally such couples do not benefit from the spousal exemption from inheritance tax when leaving their estate to one another. Couples in this situation are often described as a ‘common law husband or wife’; however, there is no such thing as far as the inheritance tax rules are concerned. It is therefore especially important for cohabiting, unmarried couples to take advice with regards to their Wills so as to ensure that they do not fall foul of double taxation, where essentially their assets are taxed as part of each estate in turn.
Inheritance tax planning: Trusts & the RNRB
When considering your Will, it is now also important to ensure that you do not lose your RNRB.
Unfortunately the legislation suggests that where the family home is placed into a Discretionary Trust by a Will, the RNRB may not apply. Similarly where the home or a share in it is held on a Life Interest Trust for the surviving spouse followed by a further trust for the children, the RNRB will not necessarily apply on the survivor’s death. While the Trustees of such Trusts may be able to avoid this happening through deeds of appointment, it is prudent to address your Will and review any existing Trusts now to avoid such a scenario occurring in the first place.
Inheritance tax planning: Grandchildren
Additionally the current legislation provides that where a grandchild is inheriting the main residence under a Will and an age contingency is set, the Residence Nil Rate Band may be lost as it is not seen as passing immediately to a lineal descendant. Again, it is important to consider this when making your Will.
Inheritance tax planning: Tapering of RNRB where estate exceeds £2million
You should also note that the RNRB will be tapered down by £1 for every £2 that your estate exceeds £2million. As a result, clients are increasingly looking at reducing their estates so that the RNRB is not tapered down.
Many couples are now considering utilising the NRB (currently £325,000) on the first death through their Will structures so that it is not included in the survivor’s estate. This has the effect of reducing the survivor’s estate which could mean that it becomes less than (or closer to) £2million that it otherwise would be, leading to the RNRB not being tapered down (or at least being tapered down less).
Due to the introduction of the RNRB and its complexity, it is important that you seek legal advice. You may need to explore estate planning opportunities that you can take to reduce the size of your estate and maximise the availability of this allowance, and you may also need to restructure your Will so that the RNRB is available.