Implementing The New Residence Nil Rate Band - April 2017
- Date: 02/03/2017
In 2007, the Conservative party announced to much fanfare that they would increase the nil rate band to £1 million, but wouldn’t commit to detail. Fast forward to 2015, and in their pre-election manifesto, the Conservatives outlined details of the policy with a commitment to “take the family home out of inheritance tax for all but the richest by raising the effective threshold for married couples and civil partners to £1 million”.
From April 2017, the government began the process of meeting their pledge. One would assume a simple increase in the personal nil rate band to £500,000 would suffice. Sadly, it is much more complicated than this.
The “residence nil rate band” (RNRB) is introduced in April, starting at £100,000, and increasing by April 2020 to £175,000 in annual £25,000 increments, resulting in a nil rate band of £1 million for married couples and civil partners. However, not everyone with an estate of £1 million will benefit:
- The RNRB, as the name implies, can only be used against your home, and specifically excludes rental properties. If a couple do not own their own home, their beneficiaries will not receive the exemption.
- If a couple's home is worth less than £350,000 their beneficiaries won't get the full £1m exemption. There are however protections in place, for those who downsize or who have sold the home to fund care fees for instance.
- The exemption is only available for those who leave the home to their children (including step, adopted and foster children) and their direct descendants. If you have chosen not to have children, or are unable to have children, and don't want to adopt or foster, your beneficiaries will not enjoy this exemption. This area is surely ripe for challenge in the future.
- As with the nil rate band, if you are not married, it does not transfer to your partner.
- If a couple die before 2020, their beneficiaries will not get a £1 million exemption.
- If your beneficiaries inherit an estate worth more than £2 million (after liabilities but before reliefs and exemptions), they will not enjoy the full £350,000. Rather they will lose £1 for every £2 in excess of £2 million; when an estate is worth more than £2.7 million, the exemption is withdrawn entirely.
This is a complicated piece of legislation with a number of nuances to consider. Indeed, the RNRB is a policy the government want to promote as helping their core electorate but one they clearly want to restrict where possible. Therefore careful planning is required to ensure your beneficiaries can use this exemption. These are our top tips:
- Ensure on second death you own a home with a value of at least £350,000. Upsizing a home valued at £200,000 for instance to a more expensive home could save your beneficiaries up to £60,000 inheritance tax.
- If you are not married, and don’t intend to, but have children, you should ensure your home is owned on a tenants in common basis, rather than as joint tenants. This will allow your children to inherit part of the home and benefit from both RNRBs, one of which would otherwise be lost (and the use of trusts may be useful here).
- Ensure any will trusts are reviewed, particularly where property is due to be settled into the trust on first death. The RNRB provisions will not apply in respect of discretionary trusts, even where children have been nominated as the only potential beneficiaries.
- Consider gifting assets prior to death to reduce the value of your total estate to below £2 million, and therefore qualify for the RNRB. Whilst the gift itself may be subject to inheritance tax, your beneficiaries would enjoy the full exemption and an inheritance tax saving of £140,000.
Whilst the increase in the nil rate band is welcomed, it is vital to ensure your affairs are correctly arranged. Given the complexity, advice from an estate planning expert would be a useful starting point.
Tom Lloyd Read, Chartered Financial Planner
Head of Advice
Article first appeared in:
What Investment (2nd March 2017) in print.
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