What is the residence nil rate band?
When a person dies, inheritance tax(IHT) is being charged on their death. The inheritance tax rate is 40% based on the value of his/her assets. This 40% rate is only charged on any value above the nil rate band. The nil rate band (£325,000 in the tax year 2016-17) is the amount which is chargeable to IHT at a 0% rate. From 6 April 2017, an additional residence nil rate band (RNRB) applies so that you might pay less IHT when the family home is left to lineal family members.
The terms of your will can affect your ability to claim a RNRB. That’s why it is important to review your will now (or make one if you don’t have a will at all) in order to make sure that your family can claim the RNRB when you or your spouse or civil partner die.
How can I benefit from RNRB?
If a person has died on or after 6 April 2017 the RNRB can be claimed on their estate. Their surviving spouse or civil partner may still be able to carry forward the RNRB to be used when they die even if that person has died before that date.
Your estate will benefit from the RNRB, in addition to the main nil rate band, if you leave your interest in the family home to direct descendants such as children or grandchildren and some other individuals such as stepchildren or adopted children as well as the spouses or civil partners of any of these (“qualifying beneficiaries”). The RNRB could help those who inherit your assets make an additional IHT saving by increasing the part of your estate that is taxed at 0% rather than 40%. Claiming the RNRB could enable an additional £100,000 to £350,000-worth of assets to pass to the next generation without any IHT charges.
You can claim the RNRB if:
- You die on or after 6 April 2017.
- You leave an estate valued at less than an upper limit, which is initially £2 million but is set to rise with inflation from 6 April 2021. The RNRB is tapered down for estates worth more than this.
- You leave your home to qualifying beneficiaries. Some trusts for these beneficiaries also qualify.
Even if you die before 6 April 2017, or you leave your home to your spouse or civil partner rather than children or grandchildren, the RNRB is not necessarily wasted as you have the option to carry it forward (together with any unused main nil rate band) for the benefit of your surviving spouse or civil partner.
If your property’s value is more than £2 million you should still review your will and property planning to see whether or not it’s possible to arrange your affairs so that you can claim the RNRB.
How much do I need to pay for RNRB?
The table below shows the RNRB levels that the government has announced (which can be added to the main nil rate band to increase the amount of assets in your estate that will be taxed at 0%). The combined nil rate bands could be worth as much as £1 million by 2021. These figures may change so it is important to check from time to time.
What happens if I sell my home?
The RNRB will still be available in the case where you have sold your home and have moved to a less valuable property, or even if you no longer own a property, assuming that you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary.
What happens if I move out of my home?
The RNRB will apply if you own a property that is no longer your residence when you die (for example, because you have moved into a care home), provided that it was your residence at some time during your period of ownership.
What if I have given my house to my children already?
Even if you have already given away your home to your children, if you still benefit from the property in some way without paying for it, for example, you continue to occupy it even though it has been given away or if you are living in it with your children after having transferred it to them, it may still be possible to claim the RNRB on your death. However, we’d still advise you to review your will.
What if my children do not want my home after my death?
It doesn’t matter whether or not the persons who inherit your home want to keep it. The RNRB will still be available even if they sell your home immediately after your death.
What if I have more than one home?
If you own more than one property that is (or has previously been) your residence when you die, your executors must choose which one will benefit from the RNRB.
Review your will or make one
To ensure you’re using the RNRB to its fullest effect we strongly recommend that you review your will (or make a will if you don’t have one). The conditions for claiming the RNRB are convoluted and you should seek expert advice to ensure that your family can benefit from the enhanced nil rate band when you or your spouse or civil partner pass away.
If you have any questions about RNRB or you need to update your will feel free to call Angie Newnham on 01202 877400!
The comments above are the writers opinion based upon the information so far available it does not constitute legal advice.