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Inheritance Tax – Residential Nil Rate Band

Inheritance Tax – Residential Nil Rate Band

Inheritance Tax – Residential Nil Rate Band

Date: November 17, 2016

HMRC has published some further guidance on the 8th November about how the extra Inheritance Tax (IHT) allowance for Residential Property (RNRB) will work in practice.

After making the announcement in the Summer Budget of 2015, HMRC has been relatively quiet over how this will be applied and so this recent news is welcome for both advisers and people who are looking at this as part of their IHT mitigation.

Basic Provision

An estate will be entitled to the RNRB if the:

• Deceased dies on or the after 6 April 2017.
• That person owns a home, or a share of one, so that it’s included in their estate.
• Children, grandchildren, great grandchildren (or their spouse or civil partner) inherit the home, or a share of it (Direct Decedents only but step children, adopted/fostered children qualify).
• Total estate if below £2m.

If someone has downsized, gifted or sold their home after the  7th July 2015 then an entitlement will also be allowed.

Estate over £2 million

The RNRB will be reduced by £1 for every £2 that the estate exceeds £2m.

RNRB Amount
The amount available will increase yearly and initially will be:
2017/2018 -  £100,000
2018/2019 -  £125,000
2019/2020 -  £150,000
2020/2021 -  £175,000

Joint Allowances
As bequests to surviving spouses or civil partners are IHT exempt, a surviving spouse or civil partner’s estate will be able to utilise both allowances, giving couples potentially and extra £350,000 nil rate of tax (by 2020/2021) that would potentially save £140,000 of tax. Like the current NRB, if some of the first persons allowance has been utilised, the survivor gets the relevant % of the allowance in the tax year that the survivor dies.

The allowance only applies to the value of the home, or share of it, inherited by a direct decedent and is capped at the maximum rate as above. If the value of the home is less than the RNRB, then the excess cannot be offset against the value of the rest of the estate.

Example one
Mrs Smith has a property worth £150,000. Mr Smith died in 2013 leaving his entire estate to his wife. Mrs Smith dies in June 2017 with an estate, excluding the house, worth £800,000. The entire estate passes between their three children.

Mrs Smith’s estate will have her £100,000 RNRB available and her husband’s RNRB so £200,000. The property therefore will be exempt under the total RNRB. The £50,000 of the RNRB cannot be offset against the remaining £800,000 of the estate, only the £650,000 NRB currently available.

This will mean however that the estate pays £60,000 of IHT (40% of £150,000)

Does it have to be the same home?
The surviving spouse or partner can move homes and it would apply to the new property at the date of their death, they do not have to remain in the jointly occupied property. As long as the surviving partner has lived in the new property at some point it may qualify.

If more than one property is owned and has been occupied at some point by the deceased then the Executors can elect which property the RNRB applied to as long as it forms part of their estate on their death.

Homes held in a Trust
If the property is held on trust for the deceased’s benefit before their death (Interest in Possession Trust), for example a  spouse or civil partner given a right to benefit from a deceased partners share of a property after their death, the RNRB will be available as normal.

If a person:

1. Disposes of a home and either downsizes OR ceases to own a home AFTER 8th July 2015 and
2. The former home would have qualified for the RNRB if it had been retained AND
3. At least SOME of the estate is inherited by Direct Descendants.

Then the Executors can claim an amount equal to the property disposed of but whether the full entitlement is available depend on the value of the estate. There are however some calculations based upon the values of the current and previous properties and a claim to be submitted to HMRC within two years of the date of death to claim this.

HMRC give the following example as guidance where someone sells their property but does not buy a new one:

Mrs K, a widow, sold a home worth £195,000 in June 2018. The maximum RNRB when the home was sold in the tax year 2018 to 2019 is £125,000. She dies in August 2020 with no home in her estate. The maximum RNRB when Mrs K dies in tax year 2020 to 2021 is £175,000. Mrs K’s estate is also entitled to transferred RNRB of £175,000.

To calculate the RNRB that her Executors can claim after her death due to the sale:

Step 1. The maximum RNRB when the home was sold was £125,000. Mrs K’s estate is also entitled to transferred RNRB of £175,000 when she dies. So the total RNRB that could have been available when the home was sold is £300,000 (£125,000 + £175,000).

Step 2. The home was worth £195,000 when it was sold. You divide this by the value at step 1 (£300,000) to give a percentage of 65%.

Step 3. There’s no home in the estate at the date of death, so the percentage is 0%.

Step 4. Taking 0% from 65% gives a percentage of 65%.

Step 5. When Mrs K dies, the maximum RNRB is £175,000. Her estate is also entitled to transferred RNRB of £175,000, so the maximum RNRB for Mrs K’s estate is £350,000. The ‘lost’ RNRB is £227,500 (65% of £350,000).

Although the lost RNRB is £227,500, the amount of the downsizing addition actually available to Mrs K’s estate depends on the value of any other assets that are left to Mrs K’s direct descendants.

The additional guidance from HMRC is certainly welcome in clarifying the RNRB is still being implemented on schedule, who can claim, who classes as direct descendants and the transferrable elements between spouses and civil partners. It also provides reassurance to people who may have to downsize for financial reasons or after the death of a loved one and those who may have to sell their home for care purposes that their estates should not lose out on the allowance too, although detailed calculations will be required at that particular time.

Whilst this should continue to help people take steps to mitigate IHT, it should be used as part of an overall strategy and certainly, if your estate is of a value where you consider relying on the RNRB to mitigate IHT wholly, then you should still seek specialist legal and financial advice to consider all your options and also to protect your wealth from other threats such as long term care costs.