What is the new Residence Nil Rate Band?

The introduction of the new Residence Nil Rate Band (RNRB) began in April 2017 and is ongoing. It is an additional inheritance tax allowance that applies to an estate where the family home is left to direct lineal descendants. These include children, grandchildren, foster children and step children.

The additional allowance is currently £125,000 for deaths that occur in the current 2018/19 tax year and it will increase by £25,000 increments until the 2020/2021 tax year where it cap out at £175,000 per person. The additional allowance can only be applied to the value of your main residence, and not to other assets. Therefore if your share in your home is less than your Residence Nil Rate Band (NRB) allowance, the remaining allowance would not be available.

Potential allowance of £1 million for a married couple
The RNRB, together with the existing Nil Rate Band, will give each individual a potential tax free allowance of £500,000.

When a spouse or civil partner dies and does not use their full NRB or RNRB, the unused percentage of those allowances can be transferred to the estate of their surviving spouse or civil partner. This means that a couple who are married or in civil partnership will have a potential combined tax free allowance of £1 million from the 2020/2021 tax year onwards. This is provided that they own a property worth at least £350,000, which they leave to their direct lineal descendants.

Potential double taxation for cohabiting couples
The transferable allowances do not apply to cohabiting, unmarried couples, and additionally such couples do not benefit from the spousal exemption from inheritance tax when leaving their estate to one another. Couples in this situation are often described as a ‘common law husband or wife’, however there is no such thing as far as the inheritance tax rules are concerned. It is therefore especially important for cohabiting, unmarried couples to take advice with regards to their Wills so as to ensure that they do not fall foul of double taxation, where essentially their assets are taxed as part of each estate in turn

Inheritance tax planning: Trusts & the RNRB
When considering your Will, it is now also important to ensure that you do not lose your Residence Nil Rate Band.

Unfortunately the legislation appears to suggest that where the family home is placed into a Discretionary Trust by a Will, the Residence Nil Rate Band may not apply. Similarly where the home or a share in it is held on a Life Interest Trust for the surviving spouse, the Residence Nil Rate Band will not always apply on the survivor’s death. Whilst the Trustees of such Trusts may be able to avoid this happening, it is prudent to address your Will and review any existing Trusts now to avoid such a scenario occurring in the first place. Many so called ‘Pilot Trusts’ were set up prior to the Nil Rate Band being made transferable between spouses, and are therefore no longer required for married couples.

Inheritance tax planning: Grandchildren
Additionally the current legislation provides that where a grandchild is inheriting the main residence under a Will and an age contingency of 21 or over is set for that inheritance, the Residence Nil Rate Band may be lost as the gift is too remote to benefit from the relief. Again, it is important to consider this when making your Will.

Finally, the Residence Nil Rate Band is still a new introduction into the Inheritance Tax regime, and therefore until it has been tested by HMRC and the courts, it is difficult to conclude how the allowance will be applied in various scenarios. It does highlight how important it is to consider your assets and the terms of your Will carefully to ensure that your beneficiaries don’t lose out on the available allowances.

By George Carter of the Wills, Trusts & Estates team at Cambridge solicitors Barr Ellison