Since 2009, the nil rate band has been frozen at £325,000 per person, and following the Chancellor’s announcements earlier this year, there is no sign of this increasing until at least April 2026.
Property prices have increased significantly during this time, especially during the past 12 months, meaning more families have been pushed over the threshold, resulting in an inheritance tax (IHT) charge of 40% on the excess.
The government introduced the residence nil rateband to combat this, aimed at helping families avoid being penalised on the rising value of their family home.
Background
The residence nil rate bnand (RNRB) was introduced in 2017. Originally, this extended the nil rate band by £100,000 per person, providing it was set against the value of the main residence.
The RNRB has gradually risen over the past few years, and is now to £175,000 per person, although, like the nil rate band, this too is frozen at this level until at least April 2026.
This can result in an effective nil rate band of up to £1 million for a couple, providing various conditions are met.
Joint Planning
On first death, the standard nil rate band can be passed to the surviving spouse, meaning that the joint estate has an effective nil rate band of £650,000.
Similarly, the RNRB can also be passed between spouses, meaning a total RNRB of up to £350,000 for a couple. Note, however, the RNRB must be claimed as it is not automatically applied.
It’s possible to claim the RNRB for a deceased spouse if:
- They died after 6th April 2017 and their interest in the property passed to the surviving spouse.
- They died before 6th April 2017, as the RNRB did not apply prior to this, and they could not have used up any of the relief through other means. This is available even if the pre-deceased spouse did not own any property.
Someone who has been widowed more than once can potentially claim more than one RNRB, however it is important to note that the maximum transferrable nil rate band an individual can claim is capped at 100% of the prevailing threshold, currently £175,000.
The transferrable nil rate bands are only available to individuals who are married or in a civil partnership.
The Property
The RNRB can only be set against the value of a residential property, and is capped at £175,000 each, or the property value, whichever is lower. This means that if the property is worth less than £175,000 (or £350,000 for a couple), it cannot be claimed in full. For example, a married couple with a property worth £300,000, would only be able to claim £300,000 of the RNRB (assuming all other conditions were met).
The new rules were intended to apply to the family home only, however there are some exceptions. For example, if a former home is still owned but rented out, it can still be used to claim RNRB, providing the other conditions are met.
Similarly, if you downsize your property or sell your home to pay for care, you can still claim the RNRB. This is providing the original home was sold after July 2015, and that, if it had been retained until death, it would have qualified for the RNRB.
Beneficiaries
To qualify for the RNRB, the property must be ‘closely inherited’. This means it must pass to:
- A child (including adopted children)
- A grandchild or great grandchild
- A step-child
- A foster child, or someone for whom the deceased was appointed legal guardian
- The spouse or civil partner of one of the above, if the original beneficiary had died.
The RNRB can still be claimed if the house is sold by the executors, without ever being legally owned by the beneficiaries.
As you can see, the list of potential beneficiaries is relatively narrow. If the property passes to anyone else, such as other relatives, including siblings, parents, nieces or nephews, the RNRB cannot be applied.
Estate Value – Beware the 60% IHT Trap
The RNRB is ‘tapered’ if the total estate is valued at over £2 million. This is applied at a rate of £1 for every £2 over the threshold.
For example an individual with an estate worth £2.1 million would have a maximum RNRB of £125,000. As their estate exceeds the threshold by £100,000, this would lead to the RNRB being tapered by £50,000.
This means that the RNRB will be lost in full for individual’s with an estate valued at £2,350,000 or more, and a couple will lose the RNRB once their estate exceeds £2.7 million. This is an effective rate of tax of 60%!
Note, no tapering applies to the standard nil rate band.
A further key difference exists between the RNRB and other aspects of estate planning, with regards to lifetime gifts. Substantial gifts made during your lifetime are known as ‘Potentially Exempt Transfers (PETs), and the value of these gifts remains inside your estate for seven years. Should death occur within seven years of the gifts, there is the potential of an IHT charge arising on the gifts, depending on the cumulative value of the gifts made within seven of death.
However, the same rules do not apply to the tapering of the RNRB, meaning ‘failed gifts’ i.e. gifts made within seven years of death, are not included when calculating the value of your estate for RNRB tapering purposes. This provides the opportunity for ‘deathbed gifting’ as a means of reducing an individual’s estate for RNRB purposes.
For example, an individual with an estate worth £2.35 million on their death would not qualify for the RNRB, as this would be tapered in full, meaning they would only have their standard Nil Rate Band of £325,000. However if this individual made a gift of £350,000 shortly before death, whilst this would ultimately fail for IHT purposes, as death has occurred within seven years, for RNRB purposes, this would reduce the value of his estate to £2 million, meaning they qualify for the RNRB in full. This could result in an IHT saving of £70,000 i.e. £175,000 x 40%
Should you wish to discuss your estate planning in more detail and the various options available, please contact Andy Hogarth on 01242 680000 or andy.hogarth@hazlewoods.co.uk.