The new ‘residence nil-rate band’ (RNRB) came into effect for deaths on or after 6 April 2017. It is available if your estate includes your home and this is left to your children, grandchildren or other lineal descendant . The amount of the RNRB is limited to the value of the home that is left to the direct descendants and the maximum RNRB (currently £100,000, but rising to £175,000 from 6 April 2020) is only available to estates below the RNRB taper threshold, currently £2m.
I usually explain that the RNRB is a bit like VAT: the concept is quite simple, but it’s extremely complex with some difficult areas.
As with all inheritance tax (IHT) planning, individual circumstances require individual approaches, but some themes are already developing about what planning for the RNRB might involve.
Widow(er) with a will trust. If a property is held in trust following the first death, it is included in the surviving spouse’s IHT estate. Unless the house is ‘directly inherited’ on the second death no RNRB is available, so trustees could consider transferring a share of the property to a child under the life tenant’s will or to the survivor to hold personally until their death .
Estate worth more than £2m.The RNRB taper threshold is linked to the value of the estate, ignoring any exemptions, reliefs or lifetime gifts. If the value of your estate exceeds £2m it must be worth considering making (even death-bed) gifts to get it below £2m, so that it qualifies for the RNRB.
Business property.As the value of the estate for the taper threshold includes business property, in many cases this could result in the loss of the RNRB. Whilst the received wisdom is to hang on to a trading company’s shares until death, perhaps there is mileage in making a lifetime gift to a trust. Doing this could increase eventual CGT costs (at 10 or 20 per cent), but you could save up to £140,000 IHT .
Joint tenants.Many couples own the family home as joint tenants. This means that on first death the home will pass to the surviving spouse, who will inherit the first spouse’s unused RNRB. If the survivor’s estate is worth more than £2m , then both RNRBs will be lost. Switching the property ownership to tenants in common would allow each spouse to control how the property passes on death, and could preserve entitlement to RNRB.
Second home.Although the RNRB applies to a person’s home, the legislation refers only to a qualifying residential property interest; this means one dwelling that has at some point been your residence. A holiday home or rental property occupied at some time in the past would therefore qualify for the RNRB, if your current main residence is given away before death.
Keep the home?Rather than giving away your home, could you give away other assets to reduce your estate below £2m? But don’t forget to leave yourself enough to live off.
Tax planning and unexpected consequences often go closely together. The ideas above all have wider tax implications, and the ideal solution for one person may be a disaster for another. Nevertheless, a conversation now could save your family £140,000 when you die, enough for them to raise a very large glass to your memory.