Inheritance Tax & the Residence Nil Rate Band – A Simple Guide!
At present every individual in the UK has a limit of £325k before any inheritance tax is payable and married couples or civil partners can effectively double this up to £650k. These are known as a person’s “Nil Rate Band” (NRB).
Since 6 April 2017, a new Residence Nil Rate Band (RNRB) has come into effect, although gradually, it will eventually take an individual’s complete threshold to £500k and £1m for a married couple or civil partners.
With the introduction of £100K (RNRB) coming into force from the 6 April 2017, this allowance will apply when a family home is passed on to a direct descendant. RNRB will increase by £25k each tax year until it has reached £175k in 2020/21. From 2021/22, the RNRB will increase in line with Consumer Price Index.
What are the rates?
|Tax Year||RNRB||NRB + RNRB|
|2017 / 2018||£100k||£425k|
|2018 / 2019||£125k||£450k|
|2019 / 2020||£150k||£475k|
|2020 / 2021||£175k||£500k|
Who are the direct descendants?
RNRB will only be allowed when you pass on a property directly to a direct descendant, which includes:-
- Adopted Children
- Foster Children
- Lineal descendants such as grandchildren
If passed onto anyone else, the RNRB will not apply to your estate
A Simple Example:
Joe Bloggs is single and has two daughters. Unfortunately, he passes away in September 2017 and leaves all of his estate to his children. His house is worth £400k and other assets of £50k. RNRB can be claimed against the first £100k of his house, which reduces the total value of his estate to £350k. Once the other NRB has been deducted (i.e £325k), £25k of Joe Bloggs estate is liable for inheritance tax at 40%, meaning a tax bill of £10k.
Are there any restrictions?
- The RNRB will only apply to an interest in one residential house. Personal representatives will have the ability to elect where there is more than one such interest in the estate
- Any unused RNRB on the first spouse/civil partner’s death can be transferred to the surviving spouse/civil partner’s estate by way of a claim made by the personal representatives of the second spouse (similar to the way the current unused NRB is transferred i.e when it is made up to £650k).
- The RNRB is restricted and tapered away by £1 for every £2 that the net value (after liabilities but before reliefs and exemptions) of an estate exceeds £2m.
- The level of allowance available to you is directly linked to the value of your house. If your house is only worth £100k on death, the relief will be capped at £100k. Any house worth over £350k after 2020, will still only get £350k of allowance.
The above is only a brief summary of the new rules, should you require further information regarding this or any other advice about your Wills please do not hesitate to contact our legal team.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.