Each individual can leave up to £325,000 (‘Nil Rate Band’) of their estate to a beneficiary which is free from inheritance tax (IHT). For spouses or widows you can combine two nil rate bands together giving you a total of £650,000 of which no IHT is payable.
Any estate worth more than £325,000 (individual) or £650,000 (combined), the remainder is taxed at 40%. This means that if you are widowed when you die and have an estate worth £1,000,000, the first £650,000 allowance is applied leaving you with £350,000 which is then taxed at 40%.
Introduction of the Residential Nil Rate Band
Since April 2017 the government have introduced an additional allowance for IHT called the Residential Nil Rate Band (‘RNRB’). This is in addition to each individual’s £325,000 allowance and can be claimed by an estate if the person died after the 6th April 2017. However, unlike the Nil Rate Band, there are certain conditions which must be adhered to in order to qualify for this additional allowance.
These new rules potentially remove millions of homes from inheritance tax liability but without an up to date Will, it is unlikely that a lot of people will benefit.
How does the RNRB work?
In order for you to successfully utilise the RNRB, these are the following requirements:
- The person dies on or after the 6th April 2017
- You own a property with another person either jointly (Joint Tenants) or you own a share in a property (Tenants in Common)
- You must leave your estate to your direct descendants. This means your children or your grandchildren who must inherit the property or a share of it.
How much extra tax allowance is applied?
The maximum available amount of the additional threshold will increase yearly.
For deaths in the following tax years it will be:
- £100,000 in 2017 to 2018 – Currently in force in addition to the Nil Rate Band of £325,000
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
For later years, the maximum additional threshold will increase in line with inflation (based on the Consumer Prices Index).
Can you transfer the RNRB to your spouse?
As with the existing Nil Rate Band you can also transfer the RNRB between spouses on death. The unused amount of the RNRB from the first death can be utilised towards relieving IHT on the second death. This is also the case if the first of the couple died before the 6th April 2017, even though the RNRB was not available.
Does this tax relief apply to all properties?
For estates valued at more than £2 million, the RNRB will be gradually withdrawn or tapered away. The additional threshold is reduced by £1 for every £2 that the value of the estate is more than the £2 million taper threshold.
Mr I dies in the tax year 2018 to 2019 leaving an estate valued at £2,100,000 to his children. This includes a home worth £450,000.
The maximum RNRB in the tax year 2018 to 2019 is £125,000.
The estate exceeds the taper threshold of £2 million by £100,000.
The RNRB is tapered away by £1 for each £2 that the estate exceeds the taper threshold. So the RNRB is reduced by £50,000:
less amount of taper – £50,000
net RNRB for the estate £75,000
If the value of Mr I’s estate was £2,250,000 or more, the RNRB of £125,000 would be tapered away completely.
What if I downsize or sell my property?
If your estate is worth £2,250,000 or more then you may be entitled a ‘downsizing addition’ as long as the following conditions apply:
- the deceased disposed of a former home and either downsized to a less valuable home, or ceased to own a home, on or after 8 July 2015
- the former home would have qualified for the additional threshold if it had been kept until death
- at least some of the estate is inherited by the deceased’s direct descendants
The amount of the downsizing addition will generally be equal to the additional threshold that’s been lost because the former home is no longer in the estate. It will also depend on the value of the other assets in the estate that are left to direct descendants. But the downsizing addition can’t exceed the maximum amount of additional threshold that would have been available if the disposal or downsizing hadn’t happened.
There may be some lost additional threshold where the deceased downsized to a less valuable home but still has a home in their estate on death. This will only happen when the value of the home at death is below the maximum additional threshold available to the estate.
The downsizing rules won’t apply if either:
- there’s no loss of the additional threshold because the value of any home at death is equal to, or more than the maximum available additional threshold
- the additional threshold isn’t available because although there is a home in the estate on death, the home isn’t left to a direct descendant
What if I own more than one property?
The RNRB will only be applicable to one property. The decision regarding which property the relief is to be applied to is made by your personal representatives. The relief does not apply to property you do not own, nor does it apply to buy-to-lets.
When the RNRB cannot be applied
The RNRB may not be applicable to your estate if you do not own a property at your death or if your direct descendants do not inherit your estate upon your death.
Dangers of Trusts
If a home is held in a discretionary trust, the home wouldn’t normally form part of a person’s estate. In these circumstances, their estate wouldn’t be eligible for the additional threshold even if the home goes to the beneficiary’s direct descendants when the beneficiary dies.
If a home is put into a discretionary trust on death, the deceased’s estate won’t qualify for the additional threshold even if the beneficiaries are direct descendants of the deceased. Whether the beneficiaries are entitled to use the home is at the discretion of the trustees, so the home won’t form part of any beneficiary’s estate and they’ll not be treated as inheriting the home.
The estate may still qualify for the additional threshold if the trust meets certain conditions. For example, if the trust has been set up for:
- a disabled beneficiary
- orphaned children under 18
- any children under 25
The RNRB will not be lost if a property is not specifically mentioned in a Will so long as it forms part of the estate on death. Nor will RNRB be lost if the property is sold during the estate administration by the executors.
If you would like more information on how Freeman Harris can assist you or your family with making a Will or probate and estate administration, please contact our team on 020 7790 7311 or email us at firstname.lastname@example.org.