Mark McLaughlin outlines the increased nil rate band (or ‘residence nil rate band’) for inheritance tax purposes where a home is passed on death to direct descendants from 6 April 2017.
New tax measures are seldom good news these days. The introduction of an increased inheritance tax (IHT) allowance from 6 April 2017 is therefore a refreshing change, albeit that it will not be available in all cases.
Residence nil rate band
Every individual is entitled to an IHT allowance (or ‘nil rate band’), which is £325,000 (i.e. the maximum in 2015/16). In addition, a claim is available for any unused nil rate band of a deceased spouse (or civil partner) to be transferred to the surviving spouse. The survivor’s nil rate band can be increased by up to 100%, or one additional nil rate band.
Furthermore, a claim for an increased nil rate band (or ‘residence nil rate band’ (RNRB)) is available from 6 April 2017, broadly where the family home is passed on death to a ‘lineal descendant’ (e.g. an adult son or daughter). The RNRB is £100,000 for 2017/18, increasing to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21 (the new legislation for the TNRB is in IHTA 1984, ss 8D-8M).
Unfortunately, the RNRB is subject to tapered withdrawal where the deceased’s estate is valued at more than £2 million on death.
It should be noted that the benefit of the RNRB is to be extended where the deceased ‘downsized’ to a less valuable residence, or ceased to own a residence at all, on or after 8 July 2015. The relevant legislation is to be included in the Finance Bill 2016.
Have my allowance!
Unused RNRB is broadly transferable between spouses (or civil partners) upon a claim being made within certain time limits.
The transfer calculation broadly involves identifying unused RNRB available from a deceased spouse, expressed as a percentage (i.e. of the RNRB at the spouse’s death). The percentage is aggregated if appropriate (e.g. if the surviving spouse was married twice, and both of the deceased spouses had unused RNRB). However, this is subject to an overriding maximum of 100%, or one additional RNRB.
If the deceased’s estate does not include an interest in the home, or if it does include such an interest but none of it passes to a lineal descendant, the person’s RNRB is nil. However, the RNRB that has not been used is available for transfer to a spouse. Thus a surviving spouse who is the sole owner of the home may still be able to claim the deceased spouse’s unused RNRB.
The parties must have been spouses immediately before the earlier death. Thus the RNRB will not be transferable if the spouses were divorced (unless they subsequently remarried each other).
Pass on £1 million IHT free?
When the government originally announced the introduction of the RNRB, it was indicated this meant that a married couple would be able to pass on £1 million between them to future generations.
This £1 million threshold assumes that each spouse has a full nil rate band of £325,000 and RNRB of £175,000 available, and that the nil rate bands are transferred on the first death to the surviving spouse. However, note that the RNRB does not reach £175,000 until 6 April 2020.
Practical Tip:
As the nil rate band and TNRB are potentially transferable between spouses, it may be attractive (for example) for married couples who jointly own the family home to leave their estate to the survivor on the first death, and thereafter to their direct descendants, with a view to sheltering up to £1 million from IHT on the second death.
Note - the above article is based on legislation that had not become law at the time of writing, and the tax provisions may therefore be subject to amendment.
