Residence Nil Rate Band has increased to £175,000 – Q&A

As of today, 6^th April 2020, the Residence Nil Rate Band (RNRB) has increased to £175,000 per person.

Q: So, what is the Residence Nil Rate Band?

A: The RNRB is an additional inheritance tax allowance which came into force in April 2017. The allowance was initially set at £100,000, increased each tax year by £25,000 until tax year 6^th April 2020/21 where it is set at £175,000, increasing the following tax years in line of inflation.

The additional inheritance tax allowance is available when you leave a ‘qualifying property’ directly to a ‘direct descendant’.

Q: What is a ‘qualifying property’?

A: Only one property can qualify for the RNRB and therefore, if you own and lived in more than one property, your executor can pick which property to apply the tax relief to.

What is essential is that the person who has died, must have owned and lived in the property at some point during their lifetime.

Q: What happens if I sell a property before my death that would have qualified?

A: This may not be a problem, as the government have provided for this scenario within the ‘downsizing provisions’. This is a complex area and professional advice may be required to assist with the calculation to ensure that the correct tax allowance is applied.

Q: Who is considered a ‘direct descendant’?

A: Accordingly to government guidelines:

• a child, grandchild or other lineal descendant
• a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

This also includes:

• a child who is, or was at any time, their step-child
• their adopted child
• a child fostered at any time by them
• a child where they’re appointed as a guardian or special guardian when the child is under 18.

Q: What if I don’t use it?

A: This is quite common, especially where a married couple leaves everything to the survivor on first death. The law provides for this scenario and confirms that the RNRB, or a proportion of it, can be transferred between spouses. This is known as the Transferable Residence Nil Rate Band. Therefore, provided that the surviving spouse leaves a qualifying property to a direct descendant, then the allowance can be claimed.

It is important to note however, that, as with other provisions relating to Inheritance Tax, the additional tax allowance can only be transferred between spouses/civil partners. It does not apply to cohabitees.

Q: What does this mean for Inheritance Tax?

A: The current rules provide that a married couple, leaving everything to each other and then down to children may have a combined tax free allowance of £1,000,000. This includes the Nil Rate Band currently set at £325,000, together with the RNRB of £175,000, both of which can be transferred between estates of spouses if unused.

For everyone else, this provides that they may have an allowance of £500,000 (taking into account their own Nil Rate Band of £325,000 and their Residence Nil Rate Band of £175,000) provided that the criteria for claiming the same are met.

Q: So, what do you need to do?

A: You may wish to give careful consideration to preparing or reviewing your Will to ensure tax efficiency in light of recent changes. Specialist advice is recommended as the manner in which your Will is prepared may affect the eligibility of the Residence Nil Rate Band. For example, the use of Trusts may affect it’s availability but will depend on the type of Trust itself. 

For advise and assistance in relation to future and Estate Planning, contact our expert Private Client team today on 01908 660966 / 01608 828282 or email privateclient@franklins-sols.co.uk.