Malcolm Finney looks at aspects of the residence nil rate band that are not commonly understood.
For inheritance tax (IHT) purposes, every individual is entitled to a nil rate band (NRB), currently worth £325,000. This means that the first £325,000 of his/her death estate (basically assets less liabilities) falls subject to a charge at 0% (assuming no lifetime gifts within seven years of death). Above this amount, IHT is charged on death at 40%.
Example 1: IHT on death
Tommy dies with assets worth £500,000 and liabilities of £100,000.
The IHT on Tommy’s death is 40% of [£400,000 - £325,000] i.e. £30,000.
Amount of residence nil rate band
For deaths occurring on or after 6 April 2017, a newly introduced residence nil rate band (RNRB) may also be available. The amount of the RNRB is as follows:
Tax Year Amount of RNRB
2017/18 £100,000
2018/19 £125,000
2019/20 £150,000
2020/21 £175,000
Availability of the RNRB
The RNRB is available where the deceased in his/her will (or on an intestacy) leaves to one or more of his/her children, grandchildren, and/or great grandchildren (or their spouse) an interest in a residence (normally, but not necessarily the family home). For this purpose, ‘child’ includes step-child, adopted child, and foster child, and a ‘residence’ refers to a place in which at some point the deceased lived with some degree of continuity. Occupying a holiday home once or twice a year would, for example, not qualify as a residence.
The RNRB is thus not available to those with no children or those not owning a residence (unless downsizing has previously occurred).
The amount of the RNRB is fixed as in the above table and is not related to the number of children etc.
Example 2: Home left to the children
Harry is married to Sarah and they jointly own a home 50:50.
Harry dies in the tax year 2017/18 with an estate worth £455,000, of which £130,000 represents Harry’s 50% interest in the marital home.
He leaves his entire estate to his two children, Bob and Bill, equally.
The RNRB is restricted to £100,000 for 2017/18 and is utilised first against the aggregate £455,000, leaving the balance of £355,000 reducible by the NRB of £325,000. Thus, £30,000 falls subject to IHT at 40% ie £12,000. Note the RNRB is set off against the total estate, not just against the residence.
Transferable RNRB
The RNRB is transferable, as is the NRB, to a surviving spouse.
The quantum transferable is, however, not based on the amount of the band unused on the first spouse’s death, but on the percentage of the band unused. This has the effect that, other things being equal, it is more advantageous for the first spouse to die to utilise none of his/her RNRB.
Example 3: Leave home to spouse instead?
Ted and Tania own a family home 50:50 worth £250,000 in 2017/18, and worth £350,000 in 2020/21. In addition, they each have an estate worth £325,000.
Ted dies in 2017/18 leaving his 50% interest in the home (£125,000) and the rest of his estate (£325,000) to his daughter Mary. An IHT charge arises of 40% of £25,000 (£450,000 – (£325,000 + £100,000)), i.e. £10,000.
If instead, Ted had left his 50% interest in the family home to Tania, he would not have utilised any part of his RNRB (i.e. 100% is unutilised). This means that on Tania’s death she would be entitled not only to her own RNRB of £175,000, but also an additional 100% thereof (i.e. £350,000 in total).
This RNRB of £350,000 compares with an aggregate RNRB (£100,000 + £175,000) had Ted left his 50% to his daughter instead as above. By leaving his 50% in the home to his wife (not daughter) an extra IHT free amount of £75,000 has been available to Tania and Ted in total.
The £1 million announcement
For many, the original announcement by the Conservatives of the £1 million IHT-free estate for married couples meant literally what it said. But effectively there are strings attached:
- First, the £1 million only applies post 6 April 2020 (when the RNRB is £175,000). In 2017/18; 2018/19 and 2019/2020 the £1 million figure is in fact £850,000; £900,000; and £950,000 respectively.
- Second, it assumes ownership of a residence at some time.
- Third, only children (and other lineal descendants) may inherit the residence: hence no children, no RNRB (and no £1 million IHT free).
- Fourth, the RNRB is not set against the inherited property but against the deceased’s aggregate estate (which means a child inheriting an interest in a parent’s residence subject to IHT may find themselves with an unexpected IHT charge).
- Fifth, the available RNRB is reduced by £1 for every £2 the deceased’s estate value exceeds £2 million (in 2017/18, the RNRB will be nil if the estate is £2.2 million or above).
Practical Tip:
Consider not leaving children an interest in the marital home on the death of the first parent to die, thus enhancing the amount of RNRB on the death of the second parent.
