Since 6 April a major change to inheritance tax (IHT) law came into effect with the launch of the Residence Nil Rate Band (RNRB). More commonly known as the 'family home allowance'the Residence Nil Rate Band is an additional inheritance tax relief which will be available when a main residence passes on death to a direct descendant.
The RNRB will be introduced over four years, starting at £100,000 for deaths which occur in the 2017/18 tax year and it will increase by £25,000 per annum until April 2020. Much like the existing rules for the transfer of unused nil rate band between spouses, it will be possible for spouses to pass unused RNRB to their surviving spouse. By operation of the existing nil rate band (which is fixed at £325,000 until April 2021), the transferable nil rate band and the RNRB, it will be possible on the death of a surviving spouse after 6 April 2020 to leave assets to the value of £1 million inheritance tax free.
The RNRB will be available where:-
- an individual dies on or after 6 April 2017;
- the individual owns a home, or a share of one, which is included in his or her estate for IHT purposes and has been occupied by the individual at some stage as his or her main residence; and
- the home or share of it is inherited by the individual’s direct descendants (such as a child, grandchild or other lineal descendant of the deceased).
The RNRB will be tapered for estates valued in excess of £2m. Where a deceased’s assets exceed the £2m threshold, the RNRB will be tapered by £1 for every £2 in excess of £2m.
There are also rules which allow individuals who have downsized or sold their homes to benefit from the RNRB. The downsizing provisions apply if:-
- an individual disposed of a former home and either downsized to a less valuable home, or ceased to own a home, after 8 July 2015;
- the former home would have qualified for the RNRB if it had been kept until death; and
- at least some of the individual’s estate is inherited by his or her direct descendants.
Beneficiaries of estates
The changes to the inheritance tax rules should also be considered by beneficiaries of estates as they have the opportunity to enter into a Deed of Variation to redirect assets within two years of a deceased’s death and the redirection is treated for inheritance tax purposes as having been included in the deceased’s Will. Therefore, individuals who benefit from a deceased’s estate in the event of a death after 6 April 2017 should consider whether there is any opportunity for post death tax planning to capture the full RNRB.
More Complex Rules
The RNRB is a significant change to the existing inheritance tax framework and a very valuable tax relief. If the RNRB is fully utilised on the death of a surviving spouse in the 2020/21 tax year, the potential inheritance tax saving would be £140,000. It is recommended that individuals should review their Wills and the structure of their assets to ensure that they will make maximum use of the reliefs available. However, the rules are complicated and it will be important for individuals to seek professional advice to ensure that their estates are structured in the most tax efficient way.