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How will people be able to benefit from the new Residence Nil Rate Band? There is a potential £40,000 Inheritance Tax Saving out there for each individual in the 2017/2018 tax year!
The Nil Rate Band
Let’s start with ‘The Nil Rate Band’ (NRB) As you may know, each individual has a Nil Rate Band. This is the amount up to which an estate would not pay Inheritance Tax (IHT) on. This is currently £325,000 for each individual. If you are married or in a civil partnership, assuming that both of your full Nil Rate Bands are available, the first £650,000 of your combined estate would not be subject to Inheritance Tax, based on current legislation.
The new Additional Residence Nil Rate Band
From April 6th 2017 there is an additional potential Nil Rate Band available when you pass your property to linier descendants. This is known as the Residence Nil Rate Band (RNRB).
When your main residence is passed on death to a direct descendant, the additional Residence Nil Rate Band for each individual will be:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
After 2021, the maximum RNRB will increase in line with inflation (based on the Consumer Prices Index).
Just like the Nil Rate Band, if you are married or in a civil partnership you would each have a RNRB.
For example £100,000 of RNRB each for the 2017 to 2018 tax year, so an extra £200,000 of your estate free of Inheritance Tax, effectively saving your estate £80,000 of Inheritance Tax.
An estate will be entitled to the RNRB when you pass on your property providing you meet the following criteria:
- Die on or after 6 April 2017, and
- Own a home, or a share of one, so that it’s included in your estate, and
- Your direct descendants inherit your home, or a share of it.
To be eligible for the RNRB, your home, or your share of it, must be left to your direct descendants so that it becomes part of the beneficiaries’ estate as a result of your death.
Who is your direct linear descendant?
Your direct linear descendant is:
- Your child, grandchild or other lineal descendant of them.
- A spouse or civil partner of your lineal descendant (including their widow, widower or surviving civil partner)
Effectively, a child who inherits your home doesn’t have to be over 18. One or more of your direct descendants can inherit your home, or a share of it, when you pass away. There are also rules to cater for step children, adopted children, fostered children and children of guardians and special guardians.
Home value apportionment
If your home is left to beneficiaries who are a mixture of direct descendants and other relatives or individuals, the value of the home must be apportioned according to the share of the property the direct descendants inherit. Direct descendants do not include nephews, nieces, siblings and other relatives.
What if I Downsize or my Spouse has already passed away?
Your estate will still be entitled to the RNRB when you downsize, sell or give your home away after the 7th July 2015. Any unused RNRB when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the RNRB wasn’t available at that time.
The RNRB only applies to one home and where it’s both included in the deceased’s estate and lived in at some stage by the deceased before their death.
Tapering away the RNRB
If your estate is valued at more than £2 million, the RNRB will be gradually withdrawn, or tapered away, even if your home is left to direct descendants. Your RNRB will be reduced by £1 for every £2 of your estate over the £2 million taper threshold. Even certain Inheritance Tax saving strategies such as Business Property Relief, will still be added in to your estate when calculating your estate value for tapering away your RNRB.
All in all there are many variables that can affect the New Residence Nil Rate Band and how it is applicable to you and your personal circumstances. Trusts, Wills and Tenancy are all factors that can affect your eligibility for the additional New Residence Nil Rate Band.
The Residence Nil Rate Band is not quite as simple as it seems. To understand more, it is sound advice to talk to a professional today.
This information is based on current legislation available from the HMRC.