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Inheritance Tax On Property - Residence Nil Rate Band

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The introduction of the new Residence Nil-Rate Band from April 2017 offers an opportunity for home owners to pass an increased amount of assets to their children and other direct descendants on death free of inheritance tax as long as it includes a share of the family home.  Although the allowance can be up to £1,000,000 by 2021 for spouses and registered civil partners who combine their allowances, as with all new areas of legislation the rules are rather complex and require careful consideration.

The  Residence Nil-Rate Band (let’s call it the “RNRB” for short) will be phased in from April 2017 and will increase over 4 years to the maximum of £175,000. It will increase in line with the consumer price index thereafter. 

The full RNRB is only available to an individual whose estate does not exceed £2,000,000 as after this point it tapers off until the estate reaches a value of £2,200,000 (2017/18) at which time the RNRB is not available. This limit will increase to £2,350,000 by 2020/21 when the RNRB rises to £175,000 per individual.  Although this sounds a lot, the value of a person’s estate for this purpose is taken as the value before any spouse exemption or other reliefs such as business property relief or agricultural property relief are applied.

For those that do qualify, the RNRB will sit on top of a person’s normal nil rate band for inheritance tax purposes (currently £325,000) so that where one owns a qualifying property and that property is left to direct descendants, one can pass up to £500,000 worth of assets, including the family home or a share in the family home, to direct descendants. As hinted at by the use of, “direct descendants” this includes not just children but quite a list: step children, adopted children, foster children, children for whom the deceased has been a special guardian, the lineal descendants of these classes of people and their spouses or registered civil partners, or surviving spouses or registered civil partners.

The RNRB can be transferred in a similar way to the normal nil-rate band so that spouses and registered civil partners can potentially leave up to £1,000,000 of assets including the family home to their descendants.

It is important to note that the RNRB is never set off against potentially exempt transfers (“PETs”) that a deceased made in the 7 years immediately preceding death although there are some planning opportunities around making PETs, whether a person survives them or not, if their estate is hovering around the £2m - £2.35m mark. There could also be planning opportunities around the use of a discretionary nil-rate band trust in a will to reduce the value of the estate of a surviving spouse or civil partner to increase the chance of attracting the RNRB on second death. They key is to take specialist advice from a legal or tax advisor on your own personal position. 

The legislation setting out the terms of the RNRB is complex and detailed. It includes provisions for what happens as and when a person wishes to downsize or even sell their home, for example they move into residential care, the details of which are for a whole separate article another day but can be found online at https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band .

There are, of course, a number of requirements for the RNRB to be available, the most important of which is that all or part of the family home must pass on to direct descendants.  This must be an absolute gift, an immediate post death interest, a bereaved minors trust or an 18 to 25 trust. This throws up a difficulty for grandparents of grandchildren for whom this type of trust is unavailable as it seems to mean that a gift over to grandchildren, which includes all or a share of the family home, must be an absolute gift and not a gift contingent on attaining a specified age. Careful thought must therefore be given to this point when preparing your will.

Finally, there is some suggestion in other articles and blogs published online that spouses should consider severing their joint tenancy on a jointly owned family home so that they hold jointly as tenants in common. This allows each individual joint owner to dispose of their share of the family home under the terms of their will. As always, it is certainly worth considering all the options and the first spouse to die could look at “locking the RNRB in” by leaving their one-half share of the family home to direct descendants on first death. However, there are a number of other issues to think about in circumstances where children or other descendants own the family home jointly with the surviving spouse such as what happens if any of the co-owners get divorced? Are made bankrupt? Want to ‘cash out’ of the house?  Consideration must also be given to whether capital gains tax would arise on any gain if the property was disposed of as it may not be the private residence of all the owners. That is not to say that there are not benefits to such a joint ownership between descendants and a surviving spouse – if the surviving spouse goes into residential care, the market value of their share of the family home can be argued to have been diminished by the joint ownership, in fact some camps argue that a joint share of a family home has no market value at all. But again, there is enough subject matter there for another complete blog.

In summary, one should not assume that the residence nil rate band will be available and it seems sensible for people to review their wills to ensure that they understand how the new rules interact with the provisions that they have made.

As always, the content of this blog does not constitute legal advice but is for information only. If you have any questions about how the residence nil-rate band affects your own estate or any question regarding the inheritance tax on property, please contact the Private Client Team or Clare King on 0113 222 3234 or via email clare.king@clarionsolicitors.com

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