Fiona Ashworth, who leads the Wills and Estates team at Colchester and Clacton-based Solicitors Thompson Smith and Puxon (TSP), discusses the implications of the introduction of the Residential Nil Rate Band (RNRB).
One of the main changes to Inheritance Tax legislation since the introduction of the transferable nil rate band in 2007 is the forthcoming introduction of the Residential Nil Rate Band (RNRB) designed to assist parents to leave their main residence to their children.
RNRB will be phased in from April 2017 and the full additional £175,000 for each individual will be available from April 2020. At this time a Husband and Wife’s combined Nil Rate Sums (£325,000 Nil Rate Band (NRB) and £175,000 RNRB) will reach £1 million. Thereafter it will increase in line with the Consumer Price Index (“CPI”).
It will be transferable between spouses and civil partners on death, and will also be available even if a parent has to sell their own home to downsize or to meet residential care costs, provided that an equivalent value of their main residence is passed to a direct descendent.
Sadly it is not a simple process and the increase in the Nil Rate Sum has many complications.
The biggest problem is that it is only fully beneficial to families who have a house worth at least £350,000 and an estate with a gross value below £2 million.
If the property value does not equal or exceed the amount of the RNRB available, then the unused sum cannot be applied against the value of the other assets in the estate. For example, the property is worth £300,000 and the free estate is worth £1 million. £300,000 of the available £350,000 RNRB can be used against the property, but the remaining £50,000 cannot be used to offset the Inheritance Tax (IHT) charge on the free estate. The maximum Nil Rate Sum claimable to offset the IHT on the free estate will be limited to £650,000, being two Nil Rate Sums of £325,000 each, thus leaving £350,000 subject to IHT at 40%, making a total of £140,000 tax payable.
Another difficulty is that if the total value of your estate exceeds £2 million the RNRB will be reduced by £1 for every £2 that you have.
In order to make sure that you can benefit from RNRB you must ensure that your combined estates fall within the £2 million threshold and that you leave your assets to a direct descendent.
In many cases this may mean that you have to revisit your Will to ensure that you comply with this requirement. For example, if you have left your residuary estate to a Discretionary Trust, even with a class of beneficiaries that may include your children and or grandchildren, it is possible that this additional amount may not be claimable because you have not left your main residence to a direct descendent.
Similarly, if you have left your spouse a life interest in your property and thereafter into a Discretionary Trust for grandchildren it may not apply.
To be absolutely sure that the RNRB is going to be available for your Executors to claim on your behalf you must leave your property, or an equivalent sum, if the property has been sold to pay for residential care fees, to a direct descendent.
Fiona Ashworth is a fully accredited member of Solicitors for the Elderly (SFE) and a full member of STEP, The Society of Trust and Estate Practitioners. For more information on the changes to IHT please contact Fiona on Fiona.firstname.lastname@example.org or 01206 217057.