Leaving beneficiaries with a hefty inheritance tax bill is a worrying prospect for many individuals. The introduction of an additional nil rate band, enabling more assets to pass free from inheritance tax will therefore be welcome news for many.
In short, the Residence Nil Rate Band (RNRB) is intended to make it easier for families to pass on the family home, upon death, by reducing the burden of inheritance tax. It will apply to individuals who die on or after 6 April 2017 who leave their interest in a residential property to a "direct descendant" including children, grandchildren and more remote lineal descendants. Interestingly, it also extends to the surviving spouse or civil partner of such direct descendants (provided that they haven't remarried.)
The RNRB will initially be set at £100,000 for 2017 - 2018 (meaning that £100,000 will be chargeable at an inheritance tax rate of 0%). This will then increase incrementally to £175,000 for 2020 - 2021 and in line with the consumer price index thereafter. The available RNRB rate will however be reduced by £1 for every £2 that the deceased's net estate exceeds £2M.
The RNBR is in effect a second nil rate band and is therefore available in addition to the existing nil rate band which is currently fixed at £325,000 until 2021. Like the existing nil rate band the unused proportion of the RNRB can be carried forward to a surviving spouse or civil partner. Helpfully, a spouse who dies on or after 6 April 2017 can benefit from a pre-deceased spouse's brought-forward RNRB, even if they died before 6 April 2017. In this case the pre-deceased spouse’s RNRB is deemed to be £100,000.
The scope of the RNBR is fairly wide and is intended to capture situations where an individual has sold their interest in a residential property prior to death and has either a) not acquired an alternative property, or b) has acquired an alternative property of a lesser value. It can, however, only be used in relation to one residential property and it’s also a requirement that the deceased lived in the property at the time that it was included in his or her estate.
While beneficial, the new measures will inevitably complicate the administration process and it’s therefore important that individuals take steps to ensure that their affairs are in order. Most importantly and above all, the introduction of the RNBR could (subject to the necessary requirements being met) enable an additional £100,000 to £350,000 worth of assets to pass free from inheritance tax resulting in savings of tens of thousands of pounds. Individuals should consider reviewing their existing Will (or consider making a Will) in light of the new measures, to ensure that the RNRB can in fact be claimed and that they are maximising their ability to pass property free from inheritance tax.