The Residence Nil Rate Band (RNRB) could potentially save a client’s estate a lot of money in Inheritance Tax.
The RNRB began on 6 April 2017. For deaths that occur after this date, estates can claim the RNRB in addition to the existing £325,000 Nil Rate Band.
The RNRB started at £100,000 per individual, and will increase by £25,000 annually every April until 2020, when it reaches £175,000. Thereafter, it will increase every year in line with inflation (CPI).
In order for a client’s estate to benefit from the RNRB, Qualifying Residential Interest (QRI) must exist. They have to pass their property to a direct descendant, and the amount of RNRB is reduced the more the deceased’s net estate exceeds the £2mn “taper threshold”.
So what exactly is Qualifying Residential Interest?
The RNRB will only be available to individuals (couples) who have a QRI i.e ownership of a residential property that has been the deceased’s home at some stage.
The property does not have to have been their main residence at the time they pass away. Thus, a property that was once the deceased’s home and was later let to tenants would qualify, but a Buy To Let property would not.
If the deceased owned multiple properties, the Executors must elect the property they wish to be treated as the QRI. The maximum amount of RNRB relief that can be claimed is restricted to the value of the property.
To qualify for the RNRB , the property must either be left by will, intestacy or survivourship to a “direct descendant”.
Definition of a direct descendant would include the following beneficiaries-
*The deceased’ children ( including adopted, fostered or stepchildren) and grandchildren.
*The spouses of those children/stepchildren.
The widows/widowers or surviving civil partners of those children or grandchildren if not remarried at the date of death of the property owner.
What is the objective of the RNRB?
The RNRB was established to assist so called “middle England” and the less wealthy, and as a result it comes with a “tapering restriction”. Essentially, the amount of RNRB available is reduced by £1 for every £2 by which the deceased’s net estate exceeds the “taper threshold” of £2m.
Situations to consider
How much RNRB can the second spouse claim?
The estate of the second spouse/civil partner to pass away will be entitled to a maximum allowance that is double the RNRB applicable at the time of the second death. This is irrespective of how long ago the first death occurred, to whom the estate was left at the time, or whether they owned a property.
There are important exemptions to this situation where-
*The first estate contained a residence that was closely inherited i.e where RNRB was claimed. This could be the case if the first spouse died after RNRB came in on 6 April 2017.
*The first estate exceeded £2m regardless of whether or not the estate included a residence. It is worth noting that the tests relating to whether relief is due and how much relief can actually be claimed will be applied to the second estate.
With regards the first situation, if the spouse passed away before RNRB came in on 6 April 2017, they will have been deemed to have not used any of their RNRB.
Initially, before it came into being RNRB raised concerns around the implications for someone who has had to sell their home.
If the first spouse passed away after April 6 2017 and RNRB was claimed, the amount available to transfer will be reduced fractionally according to any RNRB claim made by the first estate.
Thus, if the first spouse used half of their RNRB allowance, the maximum RNRB available to the estate of the second spouse would be 1.5 times the RNRB available in the year the second spouse dies. This would be the second spouse’s full RNRB allowance, in addition to half that allowance again to reflect the unused portion of the first spouse’s allowance.
In respect of the second scenario above, where the first spouse’s estate exceeded £2mn, the taper restriction applies when calculating the maximum amount of RNRB that can transfer to the second spouse.
If the first spouse passed away after 6 April 2017, the taper restriction is applied to the RNRB allowance available in the first year the spouse died. However if they died before 6 April 2017, the RNRB for this purpose is treated as being £100,000.
With this example, the maximum RNRB available to the estate of the second spouse will always be doubled.
Where a Client has sold their home-
Initially when RNRB was originally announced there was concerns around the implications for someone who has to sell their home, for example, to fund long term care provision.
In order to address these concerns, the government brought in additional provisions to provide a similar level of relief where someone sells their home or downsizes before death, providing certain terms are met.
The downsizing rules can be complicated, and it would be worth considering on a case by case basis.
The pivotal date to consider is 8 July 2015.The downsizing rules only apply to clients who sold a property after this date.
There is however no relief afforded to those who sold their only QRI before 8 July and does not acquire another one before they die.