It seems that Residence Nil Rate Bands are here to stay. Complicated as they are, they provide for an increase in the Nil Rate Band against Inheritance Tax (IHT) for people who have had a property in which they have resided and who leave it to their “direct descendants”.
Putting it simply, the Nil Rate Band is a tax free amount that is available to all individuals before IHT is calculated. The current Nil Rate Band is £325,000, and after that IHT is charged at 40% of the estate above that figure (subject to various reliefs and exemptions). The main exemption is when an estate is left to a spouse and the spouse’s inheritance is free of IHT.
The Nil Rate Band is increased by the “Residence Nil Rate Band” (RNRB) in cases where the person dies leaving a property in which they have lived and the property passes to “direct descendants”.
It is not necessary that the deceased was living in the property at the date of death. There are transitional provisions for properties sold by the deceased after July 2015 and before death.
The definition of “direct descendants” is quite wide, and specifically includes step children. However, the RNRB is not available to individuals who leave their estate to nephews and nieces, for example.
The RNRB is currently £100,000 for deaths on or after 6th April 2017. This is going to rise to £175,000 for deaths on or after 6th April 2020.
What does this mean for a “typical” couple who have a house and are leaving their estate to the children of either or both of them?
The Nil Rate Band is £325,000 per person.
The additional RNRB is now an extra £100,000 increasing to £175,000.
Hence effectively each individual could then achieve a £500,000 threshold before IHT is payable.
Due to the availability of transferable Nil Rate Bands (which have been around since 2007) then it is quite possible that between a couple who are married or in a civil partnership (or for the survivor of such a union) the IHT threshold will be £1,000,000.
In a complicated way (and biased towards individuals with “children” – in the widest possible definition of the word) the IHT threshold has increased quite significantly. The legislation is, however, quite complex and is worth looking at closely when dealing with the estate of someone whose estate may or may not be liable for IHT.