In his Summer Budget the Chancellor announced that a new relief for Inheritance Tax (IHT) would be introduced.
The Government plans on introducing the new residence nil-rate band (“RNRB”) gradually from 6th April 2017 onwards. For many, it will mean that less inheritance tax is due on the value of their estate when they die. Here, we explain what the RNRB is, how it might affect you once implemented, and some potential pitfalls to consider.
Current ‘Nil Rate Band’
At this time, everyone has a £325,000 inheritance tax allowance. This is called the ‘nil rate band’. This means you can leave £325,000 to anyone you like and no inheritance tax will be payable. If your estate is worth more than £325,000, 40% will be due on anything over the £325,000 allowance.
You may find this calculator useful: ‘This is Money’ Inheritance Tax Calculator
EXAMPLE: Your estate is worth £370,000. No inheritance tax will be due on the first £325,000. 40% will be due on the remaining £45,000. Your inheritance tax bill will be £18,000.
If you leave everything to your husband, wife or civil partner, no inheritance tax is due, regardless of the size of your estate. Because your own £325,000 nil-rate band (inheritance tax allowance) has then not been used, they can inherit this also – allowing them to leave a total of £650,000 tax free when they die. However, see the ‘Potential Pitfalls’ section below.
New ‘Residence Nil Rate Band’
The new Residence Nil Rate Band will be introduced in addition to the Current Nil Rate Band. It will help those whose estate, on death, includes a property which was their main residence, where one or more ‘direct descendants’ will be the beneficiaries.
The Government plans to phase the RNRB in between 2017 and 2021 as follows:
- £100,000 for the 2017 to 2018 tax year
- £125,000 for the 2018 to 2019 tax year
- £150,000 for the 2019 to 2020 tax year
- £175,000 for the 2020 to 2021 tax year
As for the current Nil Rate Band, your husband, wife or civil partner can inherit any unused RNRB on your death.
So if for example you died after April 2020 and left everything to your partner, they would be able to leave up to a million pounds including their main residence, tax free – provided that it is left to a direct descendant.
Leaving everything to your husband, wife or civil partner may seem like the most logical thing to do. After all, when they die, having inherited your unused allowances, they can leave everything to your children, and then your grandchildren, paying very little if any inheritance tax – right?
Unfortunately, things often don’t work that way. Some problems with this arrangement include:
- After your death, your husband, wife or civil partner remarries. The Will they made while they were married to you is automatically revoked (cancelled) because of the new marriage, and therefore no longer valid. They will have to make a new Will and typically they will leave everything to their new partner. If they die first, everything goes to the new partner. There is no guarantee that your children or grandchildren will inherit a penny – someone else’s children or grandchildren could benefit from your entire estate.
- After your death, your husband, wife or civil partner needs care. The Local Authority can take everything they own (including your share of the family assets), to fund the cost of care – leaving your partner with just £14,250 of the family assets to pass on (an amount that can quickly be used up on bills and expenses).
- After your death and your partner’s death, your child inherits but then divorces. His/her ex spouse takes half of the assets. The grand children’s future inheritance is significantly reduced.
- After your death and your partner’s death, your child gets into financial trouble. Their creditors take the estate, leaving nothing for the grandchildren.
These examples show that while the new RNRB may make it more appealing to leave everything to your partner, this may not in fact be a wise decision.
Rather than leaving everything to your partner and passing on your unused allowances, we would suggest you ensure that you and your partner own any properties as tenants in common, then look at creating a trust with your Will. You can then allow your partner to use your share of the assets (for example, the family home) during their lifetime, after which you can choose who will inherit.
This means that should your partner need care after your death, the Local Authority will not take into account your share of the estate when calculating whether they can afford to pay for the care fees.
You can, if you wish, create a trust that keeps your assets in the family for a longer period of time. For example, if you have a number of properties, you could allow your partner, then your children, then your grandchildren, then your great grandchildren to benefit from the trust income. As the assets are held in trust, they cannot pass sideways out of the family or go to your children’s creditors or an ex-partner.
Whilst the RNRB only applies to a very limited range of trusts, your trustees may make the decision to appoint capital from the trust within 2 years of your death to take advantage of the RNRB. Alternatively they may feel that, because of the Beneficiaries’ personal circumstances, it is better to leave the money in the protection of the trust. Discretionary trusts offer flexibility and can adapt to a beneficiary’s circumstances at the time.
Speak to us
Speak to us about the best way to arrange your affairs so that your assets stay in the family and are not used up by care fees. We have locations across the UK and we can also cater for home visits.
Residence Nil Rate Band – your FAQs
Q: Who can benefit from the RNRB?
Someone who owns the property that they lived in at some point during their lifetime as their main residence, and who leaves the property on death to or for the benefit of their ‘direct descendants’.
Q: What if there is no Will?
If the person who dies does not make a Will, they can still benefit from the RNRB. It applies on intestacy or, if the property is held as ‘joint tenants’ rather than ‘tenants in common’, where the property passes by survivorship.
Q: What if they were not living in the property at the time of death?
The only requirement is that it was used as their main residence at some point while they owned the property.
Q: What if they own more than one property?
They must nominate which one will benefit from RNRB.
Q: What is a ‘direct descendant’?
This is quite widely defined – it includes children, step children, adopted children, foster children, and also the spouse/civil partner of a direct descendant or widow/widower or surviving civil partner of a direct descendant if they did not remarry.
Q: What if the property is left in trust?
In some limited circumstances, the RNRB will still be available – speak to us for advice.
Q: Is the RNRB available on all estates?
The RNRB is tapered away for estates valued over £2 million.
Q: What if the person wants to downsize?
If you downsize or sell your home on or after 8 July 2015, the RNRB may still be available provided that your direct descendants are left some of your estate outright or on permitted trusts.