The Residence Nil Rate Band (RNRB) was big news when it was announced in 2015. Headlines like, Inheritance tax joy for families: Middle classes to escape death duty as threshold rises to £1 million (Daily Mail 2015) perhaps made the new legislation sound more generous than it was to those disinclined to read beyond the large print. In reality the extra relief is only available where a family home is passed to a direct descendant and nobody has a £1 million IHT allowance at the moment.
The Residence Nil Rate Band, also known as the Additional Threshold is nevertheless extremely positive news for families facing an inheritance tax bill where the family home is being passed down to direct descendants, especially if it forms a large proportion of the deceased’s estate.
How does it Work?
Inheritance Tax (IHT) is a 40% tax on your estate which is payable by your estate on your death unless your money is passed to your married spouse or civil partner. However, every estate has a nil rate band of £325,000. So that if your estate has a value of less than £325,000 on your death then your estate won’t have to pay any inheritance tax.
If you have a nil rate band of £325,000 and your estate is valued at £425,000 then the taxable estate will be £425,000 – £325,000 = £100,000. This means that your estate will have a tax bill of £40,000 (40% of £100,000) on your death.
Any unused allowance when you die can be transferred to your spouse or civil partner’s estate. This means that, before the RNRB, the maximum IHT allowance you could have was £650,000 (£325,000 for yourself and £325,000 from your deceased spouse or civil partner)
The RNRB is an extra allowance granted to estates where a family home is passed to a direct descendant.
In order to qualify for the Additional Threshold you must fulfill three main criteria
• Death must occur on or after 6 April 2017
• You must own a home, or a share of one, so that it’s included in your estate
• Your direct descendants such as children or grandchildren must inherit the home, or a share of it
An estate may also be entitled to the additional threshold when an individual has downsized to a less valuable home or sold, or given away their home after 7 July 2015.
BUT… if your total estate exceeds the £2 million mark, the amount of RNRB you will be reduced by £1 for every £2 your estate exceeds £2 million. For example, if your estate was worth £2,100,000 your RNRB would be reduced by £50,000.
How much is the Additional Threshold worth?
The maximum amount of RNRB available will increase each year:
• In 2017/18 it will be worth a maximum of £100,000
• In 2018/19 it will be worth a maximum of £125,000
• In 2019/20 it will be worth a maximum of £150,000
• In 2020/21 it will be worth a maximum of £175,000
So where does this £1 million figure come from?
You will only benefit from the full £1 million allowance figure in a specific set of circumstances:
1. You have survived a spouse or civil partner who passed their entire, unused IHT allowance to you on their death.
2. You have an estate valued at between £1 million and £2 million.
3. You have a property which you are passing to a direct descendant (child, grandchild, step-child, adopted child etc)
4. Your death occurs after 6th April 2020.
What about trusts?
Cases where a property is held in a trust can be extremely complicated and every case should be assessed by an expert before a conclusion is reached. The rough rule of thumb is; if your property falls inside your estate you should be able to claim the Additional Threshold, provided you meet all the other criteria.