During their 2015 election campaign, the Conservative Party pledged to “take the family home out of Inheritance Tax by raising the Nil Rate Band to £1 million for couples and civil partners”. When the Conservatives got elected they did not simply increase the current Nil Rate Band (“NRB”) but introduced the Residence Nil Rate Band (“RNRB”) in order to meet their campaign pledge.

The Residence Nil Rate Band

An estate will be entitled to a RNRB if all of the following conditions are met:

• An individual dies on or after 6 April 2017;
• The individual owns a home or share of a home that will be included in their estate;
• The individual’s direct descendants such as children or grandchildren inherit the home or a share of the home; and
• Their estate is valued at £2 million or less.

The RNRB will start at £100,000 in the 2017/18 tax year, rising to £175,000 in the 2020/21 tax year. For later years it will increase in line with inflation. It is restricted to lower of the net value of the home and the RNRB for the relevant tax year of death.

For example, Mr Smith dies on 6 May 2019 when the RNRB is £150,000, but his home is valued at £125,000. In this instance the RNRB will be restricted to £125,000 and the remaining £25,000 cannot be added to the NRB. However, like the NRB, the unused RNRB is transferable to the surviving spouse/civil partner and available to use on the second death. The RNRB can still be transferred even if the first death occurred before 6 April 2017.

So from the 2020/21 tax year, the £1M Nil Rate Band can be achieved by the surviving spouse where the maximum NRB and RNRB (£325,000 and £175,000 respectively) have been transferred from the deceased spouse and then added to their own NRB and RNRB.

The RNRB is not available in respect of lifetime transfers and does not apply to gifts to Discretionary Trusts for the benefit of lineal descendants, even on death. The home does not need to be the deceased’s Principal Private Residence but must be a property that was owned by the deceased and lived in at some point before death. The RNRB is not available on buy to let properties.

The RNRB is, however, available on Gifts with Reservation of Benefit. If the deceased transferred their home to their children prior to death but continued to live there, the home remains in the deceased’s estate for inheritance tax purposes, which is a Gift with Reservation of Benefit.

For estates valued at more than £2 million the RNRB will be reduced by £1 for every £2 that the deceased’s estate exceeds £2 million. Therefore, when an estate is valued at more than £2.35 million in the 2020/21 tax year, no RNRB will be available.

When calculating the value of the deceased’s estate in respect of their entitlement to RNRB, no consideration is given to spousal exemptions and Inheritance Tax Reliefs such as Agricultural Property Relief and Business Property Relief. For example, if the deceased’s estate comprises shares in a private limited trading company valued at £6 million and other assets worth £1.8 million, despite Business Property Relief providing 100% relief from Inheritance Tax on the shares, entitlement to RNRB would be nil as the full value of the estate before reliefs (£7.8 million) must be used for the RNRB calculation.

Downsizing

If the value of the house in the deceased’s estate is lower than the maximum RNRB, it may be possible to claim a downsizing addition in order to benefit from the full RNRB. The Downsizing Addition must be claimed by the deceased’s Personal Representatives within two years of the deceased’s death and the following conditions must be met:

• The deceased downsized to a less valuable home or ceased to own a home, on or after 8 July 2015;
• The former home would have qualified for the full RNRB if it had been owned at death; and
• At least some of the deceased’s estate is inherited by the deceased’s lineal descendants.

While the Conservatives did not entirely deliver on their promise to increase a couple’s and civil partners’ NRB to £1 million, it is expected that the RNRB will remove approximately £9.5 billion of residential properties from the Inheritance Tax net.

Inheritance Tax can substantially reduce the value of an estate that can be passed on to future generations. Fortunately, with careful planning, Inheritance Tax liabilities can be significantly mitigated or even reduced to nil.

This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult a professional adviser before undertaking any tax planning.

Caroline Keenan is a Tax Director with ASM Chartered Accountants

Email: caroline.keenan@asmbelfast.com.