The new Residence Nil Rate Band (RNRB) provision could save your loved ones thousands of pounds in inheritance tax.
If you die during the 2017/18 tax year, and your estate includes a home which you owned and lived in during your lifetime AND you leave this to one or more of your direct descendants, your executors may be able to claim the RNRB, an additional inheritance tax free allowance of up to £100,000 in addition to the inheritance tax nil rate band.
The RNRB is due to increase by £25,000 in each tax year until it reaches £175,000 in the 2020/2021 tax year. Which homes qualify?
Any home, in which you actually lived at any time during your lifetime. Your executors can elect to which home they apply the RNRB if you own more than one and they are included in your residuary estate.
If you are permanently living in the UK but also own a home abroad, in which you once lived, your executors can elect to apply it to this property.
Your executors may also be entitled to claim the RNRB if you sold your home or downsized on or after 8 July 2015 if the former home would have qualified for RNRB if you still had it at the time of your death and assets representing or equivalent to the sale proceeds remain in your estate at your death. NB:
- RNRB cannot apply to buy-to-let homes, in which you have never lived.
Who are direct descendants?
- There is a tapered reduction of the RNRB for high value estates worth more than £2 million, whereby the additional benefit available will be reduced by £1 for each additional £2 over £2 million. So if, for example, your estate is worth £2.2 million in the current tax year (2017/18) no additional Residence Nil Rate Band is available since the current RNRB for this year is £100,000.
Your “direct descendants” under the new law are defined as lineal descendants such as children, step-children, adopted children (or equivalent grandchildren), foster children or those under 18, for whom you acted as guardian, or their wife, husband, civil partner or widow, widower or surviving civil partner.
They do not include siblings or nephews and nieces. Transfer of the RNRB
As you may know, property gifted between spouses or civil partners is exempt from inheritance tax or capital gains tax. If one spouse leaves his/her entire estate to the other, there will be no inheritance tax payable.
To save the nil rate band of the first spouse to die being wasted, any unused portion can be claimed by the executors of the surviving spouse on his or hear death and transferred to his/her estate. The estate will then benefit from two nil rate bands, £625,000 in total at today’s rates. The RNRB (or any unused portion) can be transferred between spouses and civil partners in the same way as the basic nil rate band. Why you need to make a will or review your existing will
If you own a property or have recently sold a property, which you owned and lived in, but do not have a will or if your current will was drafted before the advent of the RNRB, taking advice on whether your estate could benefit from the RNRB could save your beneficiaries many thousands of pounds in tax.
If you would like to talk to us about the issues raised in this article or making or amending your will please contact Joanna Stephenson, Partner, Joanna.firstname.lastname@example.org
or call the office on +44 20 3701 7395. Articles are for general guidance only and discuss the legal position in the UK at the time of publication unless stated otherwise. You must take legal advice and not rely on the information provided in our articles before taking action. We do not update our articles and therefore, past articles may not reflect the current legal position. Where we refer to Court decisions facts are stated as reported by the Court.