On 18 November 2015, the Residence Nil Rate Band (RNRB) for inheritance tax (IHT) was brought into force.
In the summer Budget, George Osborne said: "You can pass up to £1m on to your children free of IHT. No more IHT on family homes". As usual with these announcements, it is never quite as straightforward as it first seems and the devil was in the detail.
What we have now is the standard IHT nil rate band (NRB), which is frozen until 6 April 2021, and the RNRB to help protect the main residence from IHT.
It was a pity the Chancellor decided not to introduce a smaller and much more straightforward increase to the NRB. What we have now is a very complex new threshold welded into the IHT legislation.
The RNRB is to apply to transfers on deaths on or after 6 April 2017. The new threshold starts at £100,000 in 2017/18 and it then increases to £125,000 in 2018/19, £150,000 in 2019/20, before reaching £175,000 in 2020/21. Following this, both the NRB and the RNRB are to increase in line with CPI inflation.
'Transfers on death' covers property left under a will, passing under intestacy or by way of a "survivorship" destination in the title deeds to a property.
The RNRB can only be used against a main residence that is left outright to direct descendants. It is to apply against any chargeable bequests of a residence on death before any reduction of the standard NRB.
A main residence is closely tied to property qualifying for "principal private residence" relief under the capital gains tax legislation. If there is more than one residence of a deceased at his or her death, the deceased's executors can nominate which residence is to be covered by the RNRB.
Direct descendants obviously includes children and grandchildren but also includes adopted children and step-children.
Whilst the legislation refers to a residence being left outright to direct descendants, the RNRB will be available if the main residence passes to a trust following a death, in certain limited circumstances. Property held following death in an immediate post-death interest (liferent) trust will be included, as will property held on bare trust and property held on trust for a "bereaved minor" and on "age 18 - 25 trusts". Any other trust arrangements, such as property passing (or with the potential to pass) to a trust with an age contingency beyond age 25, or property passing to a discretionary trust will not be covered by the RNRB.
Unused RNRB is transferable to a surviving spouse's estate, whether or not the first spouse to die could have used RNRB, providing the surviving spouse owns or owned a house.
If the first death occurred before 6 April 2017, the transferable RNRB is taken to be £100,000, so that RNRB is always transferable in full, unless the value of the estate of the first to die exceeded £2m (see below), but irrespective of whether that spouse could have used RNRB and irrespective of the beneficiary or beneficiaries that inherited the estate of the first to die.
The RNRB is to taper away where an estate exceeds £2m by £1 for every £2 in excess of the taper threshold so that the RNRB does not apply to estates with a value of £2.2m, or more. The taper threshold applies to the estate after deduction of liabilities and funeral expenses but before any IHT reliefs or exemptions. This, therefore, means that business property relief, agricultural property relief, spouse exemption and charity exemption are ignored for these purposes. The taper threshold applies on the first and / or second deaths.
This may mean consideration will have to be given to using RNRB on the first death or to deathbed planning - to reduce a surviving spouse's estate under the taper threshold on the second death.
It is also the Government's intention is to ensure RNRB is available to those who downsize before death and after the RNRB was announced (8 July 2015). Detailed rules will be contained in further legislation to be put before Parliament, so it is not possible to comment on this at this stage.
This note is just a brief summary of the position of RNRB so far. A highly complex new IHT threshold has been introduced, which will make the need for expert professional advice when drafting wills and administering estates even more necessary.
This blog was written by Alasdair R Fleming - alasdair.robin.fleming@brodies.com or 0141 245 6266.
For more on wills, succession, executries, trusts, estate planning or inheritance tax please contact Alasdair, your usual Brodies contact or any of the partners in our Legal 500 and Chambers & Partners Band 1 rated private client team:-
Alan Barr- 0131 656 0103 or alan.barr@brodies.com
Susanne Beveridge- 0131 656 0218 or susanne.beveridge@brodies.com
Mark Stewart- 01224 392 282 or mark.stewart@brodies.com
Norman Kennedy- 0141 245 6265 or norman.kennedy@brodies.com
