A brief explanation of the new residence Nil Rate Band
April 2017 sees the introduction of the Residence Nil Rate Band (RNRB) and advisers should be aware of the implications when calculating clients’ potential Inheritance Tax (IHT) liability. This piece of legislation was initially proposed by the then Chancellor of the Exchequer, George Osborne, in his summer budget of 2015. His intention was as follows:
“You can pass up to £1 million on to your children free of Inheritance Tax. No more Inheritance Tax on family homes.
However, as with most pieces of legislation the devil is in the detail. The statement above sounds a bold one to make but there are complications and the reality is that for it to be true, it is dependent on the following:
Whether there are children
The value of the family home
The value of the total estate at time of death
Who inherits the family home
The time of death
An estate will be entitled to the RNRB if the:
- Individual dies on or after 6th April 2017
- Individual owns a home, or a share of one, so that it is included in their estate
- Individuals’ direct descendants such as children or grandchildren inherit the home or a share of it
- Value of the estate is not more than £2 million (tapered over this amount)
- Individual has downsized to a less valuable home or sold or given away their home after 7th July 2015
The RNRB is a means of topping up the existing Nil Rate Band (NRB) currently frozen at £325,000 per individual. This will potentially reduce the amount of the estate, subject to the 40% IHT rate, by offsetting an increasing amount against an interest in a family home if left to direct beneficiaries such as children, grandchildren or other direct descendants.
The RNRB is currently set at a maximum amount of £100,000 if death occurs in the 2017/2018 tax year. This amount will increase by £25,000 each year until it reaches £175,000 in the 2020/21 tax year. Subsequently, the RNRB will only increase in line with the annual increases in the consumer price index.
An important point to remember when considering the family home is that if it is encumbered by either a mortgage or an equity release scheme at the time of the death that will trigger IHT, this debt will be considered when calculating the level of RNRB.
HOW IS RNRB CALCULATED AND APPLIED TO AN INDIVIDUAL’S ESTATE WHEN CALCULATING POTENTIAL IHT?
First steps are to ensure that the family home qualifies for RNRB and then the amount of the RNRB that can be due on an estate will be the lower of:
- The value of the home or share that is inherited by children, grandchildren or other direct descendants
- The maximum RNRB available for the estate in the year the individual died
The advice is to calculate the RNRB including any transferred RNRB from a late spouse (or civil partner’s estate) before adding it to the NRB (including any transferred or unused NRB).
CAPITAL AT RISK
If you have any questions regarding the Residence Nil Rate Band, please do not hesitate to contact Blackfinch on 01684 571 255 or email [email protected].
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