Sarah Bradford outlines when the inheritance tax residence nil rate band is available and how it can be claimed.
The residence nil rate band (RNRB) is an additional nil rate band for inheritance tax (IHT) purposes, which increases the amount that a taxpayer can leave tax-free on death where his or her estate includes a residence that is left to one or more direct descendants.
The RNRB is available where the deceased died on or after 6 April 2017. As with the normal nil rate band, where the nil rate band is not fully utilised on the death of the first spouse or civil partner, the unused proportion can be used on the death of the surviving spouse or civil partner. The surviving spouse or civil partner can still benefit from the transferred RNRB, even if the first death occurred before 6 April 2017, as long as the surviving spouse or civil partner died on or after that date.
The RNRB may also be available where the deceased sold his or her residence or downsized on or after 8 July 2015.
The RNRB is applied before the ‘standard’ nil rate band.
How much is the RNRB?
The RNRB is being phased in gradually. It is set at £100,000 for 2017/18, increasing to £125,000 for 2018/19, £150,000 for 2019/20 and to £175,000 for 2020/21. Thereafter, it will be increased annually in line with increases in the consumer prices index.
Where the value of the residence (including any proceeds from downsizing) are less than the RNRB for the tax year, the RNRB is capped at the value of the residence. However, if it is not fully used on the death of the first spouse or civil partner to die, any unused proportion is transferred to the surviving spouse.
Tip:
The introduction of the RNRB will enable a couple to leave an estate of £1 million tax-free by 2020/21, as long as the estate includes a residence valued at £350,000 which is left to direct descendants.
Trap:
The RNRB is tapered away where the estate in question is valued at more than £2 million. Where this is the case, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.
Direct descendants
The RNRB is only available if the residence is left to one or more direct descendants. This will be the case if it is left to them on death in the deceased’s will, under the rules of intestacy or by some other legal means as a result of the person’s death.
For the purposes of the RNRB, a direct descendant is a child, grandchild, etc. of the deceased. The definition covers biological, step, adopted and foster children. It also includes a child for whom the deceased was a guardian at the time of his or her death. The spouse or civil partner of a direct descendant is also treated as a direct descendant.
It is not necessary for the residence to end up in the hands of the direct descendant – the RNRB is still available if the residence is sold as part of the administration of the estate and the proceeds are passed to the direct descendants.
Where the descendant has downsized on or after 8 July 2015, the RNRB is available to shelter sale proceeds left to a direct descendant.
Claiming the RNRB
The RNRB must be claimed. There is a form for this purpose – IHT435. The form is available on the Gov.uk website at www.gov.uk/government/publications/claim-the-residence-nil-rate-band-rnrb-iht435. The form can be completed online and printed off.
You will need to complete the form fully in one go and print it off – it is not possible to save a partly completed form.
Details of the deceased, the deceased’s estate and the residence in respect of which the RNRB is claimed must be provided. It is also necessary to state the percentage of the residence passing to direct descendants and to provide details of the chargeable value of the residence. The form can also be used to claim any downsizing allowance.
If any RNRB not used on the death of a spouse or civil partner is being claimed, this must be noted on the form. However, the actual claim must be made on form IHT436.
Once completed, the form should be sent to:
Inheritance Tax
HM Revenue and Customs
BX9 1HT.
Practical Tip:
The RNRB is a valuable relief. However, it must be claimed. It is important that the need to file form IHT435 is not overlooked.
