The UK’s new Residential Nil Rate Band – Does It Affect You?
Written by Sam Barrie on July 14, 2017.
As of 6th April 2017 homeowners in the UK with estates below £2m will be able to transfer their primary residence to family members with a huge reduction in inheritance tax.
This is thanks to the newly introduced Residence Nil Rate Band (RNRB) which applies to estates where a home, or share of one, is left to direct descendants of the deceased when their estate is valued at under £2m (rising to £2.35m in 2021/22). Direct descendants include stepchildren as well as children (including step, foster and adopted children) and grandchildren but not siblings, nephews or nieces.
Prior to the new legislation the inheritance tax threshold was set at £325,000, or £650,000 for couples as the nil-rate band (NRB) threshold is transferable between spouses and those in civil partnerships. That threshold still stands, and will be frozen until 2021, but the RNRB is an added bonus which will increase annually from its current level of £100,000 over the next three years to reach £175,000 from April 2020. Unused RNRB can be transferred between married couples and those in civil partnerships, even if the first partner died prior to 6th April 2017 when the RNRB was introduced.
Effectively this means that from April 2020 couples will be able to bequeath a legacy of up to £1m to their children or grandchildren without paying any inheritance tax, each partner benefitting from both the nil-rate band threshold of £325,000 plus the £175,000 RNRB.
Older homeowners do not have to stay in their homes in order to benefit from the RNRB. The legislation has been written so as not to discourage an elderly person downsizing or moving into residential care or a relative’s home. Anyone selling a house after 7th July 2015 will benefit from the RNRB as they would have done had they kept hold of it until death, and that they leave the downsized residence or assets of equivalent value to their direct descendants. There is no maximum time limit between disposing of the home and the death.
Homeowners do have to have lived in the home at some point though and be included in the deceased’s estate – buy-to-let properties and those in discretionary trusts will not benefit from RNRB. If the estate includes more than one eligible property, the descendants will have to choose which one benefits from the RNRB.
The new rules will be welcomed by many UK homeowners, and British domiciled expatriates with homes overseas, but there are a few traps to avoid. A relatively high percentage of over 55s currently have wills which pass the family home to siblings who will not benefit from RNRB. With this in mind, they might want to rewrite their wills. Similarly, those with estates valued at over £2m will have their additional nil-rate band gradually withdrawn by £1 for every £2 over the threshold.
Married couples whose individual estates are below £2m, but combined exceeds this level and are joint tenants, should consider becoming ‘tenants in common’ to enable them to control how the property passes on death. They may, in this way be able to keep their entitlement to RNRB by leaving their part of the family home to their children on the first death.
As ever with tax issues, the devil is in the detail and I would strongly advise seeking advice which takes into consideration your own personal circumstances. If you are a UK homeowner or believe that you are UK domiciled, now is definitely a good time to review your position. Get in touch with me at firstname.lastname@example.org and I would be happy to discuss your situation and see what I can do to help.
All information in this article was sourced from www.gov.uk in July 2017 and is current at the time of writing.