The beginning of the new tax year on 6th April 2019 marks the second increase in the Residence Nil Rate Band which originally came into force in April 2017. The increase in this Inheritance Tax Allowance is the second of three increases at the start of each tax year, with the last in April 2020.
Here are the most important things you need to know about this Inheritance Tax allowance;
How much is the new increased allowance?
The allowance was introduced on the 6th of April 2017 at a rate of £100,000. This increased on 6th April 2018 by £25,000 to £125,000 and it has now risen by another £25,000 to £150,000 from the 6th of April 2019. The final increase will be on 6th April 2020 when the allowance reaches £175,000. It will then only rise in line with inflation and this will be measured by the Consumer Price Index.
In a similar way to the ordinary Nil Rate Band operates (currently £325,000), if your estate passes to your spouse on first death, when your spouse dies they will have their own residential nil rate band and will be entitled to use your transferable residential nil rate band as well.
How can you qualify for the relief?
You can only qualify for the relief if your property is passing to “direct descendants” on death. Direct descendants are set out in the legislation as children, grandchildren, step-children, adopted children or fostered children. Your property must be passing to one of these groups on death, or on second death if you are a married couple. Nieces and nephews do not qualify.
What are the main restrictions?
1. The most notable is that the relief is only available on estates under £2 million. Once an estate is over this amount, the relief tapers by £1 for every £2 and this means by 2020, if your estate is worth over £2,350,000, it will not qualify for any relief (and there will be no transferable nil rate band relief to pass to a surviving spouse/civil partner).
2. The level of allowance available to you is directly linked to the value of your property. If your property is only worth £100,000 on death, the relief will be capped at £100,000. Any house worth over £350,000 after 2020, will still only get £350,000 of allowance.
3. Property that passes into a Discretionary Trust on death for the potential benefit of direct descendants will not qualify. This is because the property has to be becoming part of the direct descendant’s estate. However, this does mean that property which is being held in Liferent Trusts for the ultimate benefit of direct descendants will still qualify for the relief.
Do you miss out if you downsize, sell your house or move into residential care?
As long as this was done after 8 July 2015 then the answer is no. If you downsize your property, the relief will still be available on the value of your previous property as long as the new property and/or the remaining funds are passing to direct descendants. Good record keeping is essential in these circumstances and it is sensible to ring fence the capital which was not reinvested in the new property so that it is easily identifiable to HMRC on your death.
Can I use the RNRB on more than one property?
No. If you own more than one property, you do not get a separate relief for each property and you cannot carry over any unused relief to use as relief on a second property. Only one residential property will qualify and the executors of your Will must nominate which property it will be applied to. You must have lived in the property for a period before your death, although you need not have lived their permanently. In some circumstances, a holiday home could therefore be the nominated property if it is worth more than the family home.
What issues should I be thinking about now?
Firstly, you should review your Will. Many Wills make use of Discretionary Trusts and although these types of Trust provide many benefits, they may prevent you and your spouse or civil partner from qualifying for up to £350,000 of tax free allowance after 2020.
If your estate is just over £2 million, you may want to speak to a professional advisor about how you can reduce your estate to below this figure to ensure that you qualify for this allowance on death.
As with all tax planning, keep your Will under review and keep good records. If you plan to downsize, make sure that any funds that are not reinvested in your new property are identifiable as funds still passing to direct descendants on death.
Nil Rate Bands often appear to be straightforward as a concept, but can give rise to complex issues. This article offers an oversight to this tax relief and how it operates generally.
If you need more information or specific advice, please contact Chris Gardiner on 03330 430150.
