The Residence Nil Rate Band (RNRB) comes into force for deaths on or after today, 6 April 2017. Much has been written about this new inheritance tax (IHT) allowance since it was introduced in the summer Budget of 2015. However, due to its technical nature, there is still much uncertainty surrounding its application in practice. This blog is the first in a series of three regarding the RNRB and provides an introductory summary (if there is such a thing) of the key points of the RNRB.
1. The RNRB will be phased in over four yearsThe RNRB will be available for deaths on or after 6 April 2017. The allowance will be phased in over four years. For deaths in tax year 2017/18, the maximum allowance will be £100,000, rising to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. Thereafter, the RNRB will increase in line with the Consumer Price Index.
2. The RNRB applies in addition to the existing Nil Rate Band (NRB)The RNRB applies in addition to the existing IHT Nil Rate Band (NRB), which has been frozen at £325,000 until 6 April 2021. In short, if the deceased satisfies the RNRB conditions (more on these below), by 2020/21 they could benefit from the RNRB of £175,000 in addition to the NRB of £325,000 and IHT would only be charged above this combined amount. Notably, the RNRB reduces the IHT chargeable against the deceased's entire estate, and not just their main residence.
3. The RNRB only applies if your estate includes a "qualifying residential interest"The RNRB only applies to a "qualifying residential interest". Broadly, the RNRB will apply to a property that has been the deceased's residence "at some point". There is no requirement for the property to have constituted the deceased's main residence and if the deceased owned more than one property, their executors can nominate which property should be covered by the RNRB (see below if the deceased disposed of the residence before death).
4. The "qualifying residential interest" must be "closely inherited"To qualify for the RNRB, the property must be "closely inherited". That is, the property must pass to the deceased's "lineal descendants" on death. A "lineal descendant" includes a child, grandchild or remoter descendant, and their spouses and civil partners are also included in some circumstances. The RNRB also applies where the property is left to foster children, adopted children, step-children and children for whom the deceased was a guardian (or descendants of any of these individuals). The property is "inherited" when it passes under the provisions of a will, intestacy (if there is no will) or by way of a survivorship destination in the title deeds (the ownership documents for the property).
5. If you leave your property to your children in trust, the RNRB may not applyThe legislation refers to a property being left outright to descendants. However, it is not uncommon for parents to leave assets to their child, grandchild etc. in a trust structure until that individual has reached a certain age. In these circumstances, the RNRB will only be available where the property passes to the following types of trust on death:
- an 'immediate post-death interest' or 'liferent' trust, where the 'lineal descendant' has an interest in possession in the property;
- a 'bare trust';
- an '18 - 25 trust';
- a trust for a bereaved minor; or
- a disabled person's trust.