The Nil Rate Band (‘NRB’) is a straightforward concept. However, this basic idea is getting ever more complicated to achieve the government’s aim of a £1 million tax free sum for couples and specialist advice is often needed.
An individual’s estate is subject to Inheritance Tax (‘IHT’) at 40% to the extent that it exceeds the NRB (currently £325,000). Other IHT exemptions and reliefs may apply, but the first £325,000 of an otherwise taxable estate is taxed at 0%. In 2007, the government introduced the ability for the executors of a deceased person to transfer any unused NRB from the estate of the deceased’s spouse or civil partner, no matter when he or she died, to be used in addition to the deceased’s own NRB.
The introduction of the Residence Nil Rate Band (‘RNRB’) and the Transferable Residence Nil Rate Band is set to complicate matters however. The RNRB will come into effect in April 2017, starting at £100,000 and increasing by £25,000 per year until it reaches £175,000 in April 2020. It will be available to individuals who leave a residence on death to direct descendants but the allowance will be tapered where the net value of the deceased’s estate exceeds £2m. There are downsizing provisions which will come into play where the deceased owned a house which would have qualified, but sold it or downsized after 8th July 2015.
It will be possible (like the ‘ordinary’ NRB) to claim the unused RNRB of a deceased spouse or civil partner, including those who died before the introduction of the RNRB, and transfer the benefit to be used on the second death. In order to make full use of the tax savings offered by RNRB, however, much thought and care is needed in the drafting of Wills and in some cases post-death estate planning. Particular consideration will be required in cases where the £2m taper threshold might be exceeded.
The definition of direct descendants is widely defined to included step-children and foster children, as well as certain types of trusts to benefit descendants which give such beneficiaries a defined right. It should be added that, where a residence is left on discretionary trusts or forms part of the deceased’s residuary estate left on discretionary trusts, provided the property is appointed out of the trust to a direct descendant or descendants within 2 years of the death, in most cases the RNRB can still be claimed.
HMRC have produced guidance notes which can be accessed here but for more information please do contact the partner having responsibility for your affairs or any partner in the Private Client Department.