Blog, Conveyancing : 4th January 2021
The basics
From the 6th of April 2017 the Government introduced an inheritance tax relief known as the Residential Nil Rate Band (RNRB) which is applicable to Estates where a residential property is left to a direct decedent on death.
In order to qualify for the RNRB relief the following criteria would have to be met:-
• Own or had owned a property with a qualifying residential interest i.e. the deceased had lived in it whilst owning the property at some stage;
• The beneficiary of that property (see downsizing below) is a direct decedent i.e. a child/grandchild/step child
• Have to make an application to claim it within two years of death
• The beneficiary is entitled to the gift on death absolutely i.e. generally no trust.
The current RNRB is £175,000. Previous rates were:-
£100,000 for 2017/2018
£125,000 for 2018/2019
£150,000 for 2019/2020
£175,000 for 2020/2021
Index linked increase April 2021 onwards
Transferrable Residential Nil Rate Band (TRNRB)
It is possible for any part of or whole of the RNRB to be transferred from a predeceased spouse’s Estate even if s/he passed before the 6th of April 2017. At a minimum one could claim £100,000 and at the most the full rate at the time of the second death.
Scenario 1
Angie died in 2002 leaving her entire Estate to her surviving Husband Ravi. When Ravi died in June 2020 his Estate was worth £850,000 with a property he lived in whilst owning it which he left to his two daughters equally worth £550,000.
Ravi’s Estate qualifies for the RNRB at the full rate of £175,000 and also a claim for TRNRB for his wife’s Estate so his Estate can use up to £350,000 relief against the property left to his daughters.
Transferable NRNB must be claimed within two years of the second to die.
Tapering of the Residential Nil Rate Band
The RNRB will be reduced by £1 for every £2 over a £2,000,000 gross Estate.
Scenario 2
Daphne, a spinster, died in May 2020 with an Estate worth £2,350,00 from which she left a property to her son worth £250,000 her entire RNRB would be lost.
However if we take the same figures in Scenario 2 but this time Daphne is a widow and her predeceased spouse not having an Estate greater than £2,000,000 who died in 2017; Daphne’s Estate can claim a TRNRB for the full amount of £175,000 (the rate at the last to die) and this can be used against the property being gifted together with her RNRB exemption of equal amount.
Downsizing
The RNRB is available even if a property is sold to either move into a care home or rented accommodation i.e. less than the RNRB applicable as long as the surplus funds from the sale are left to a direct decedent.
For example Lesley sells her residential home she owns and has lived in for 25 years for £850,000 in October 2017 and moves into a care home. She dies in July 2020 where the sale proceeds have dwindled to £620,000 which she leaves to her granddaughter, Kate absolutely. Lesley’s estate will qualify for RNRB.
The downsizing must have taken place on or before the 8th of July 2015. However, RNRB is still available to a qualifying property which is no longer the deceased’s home but part of his/her estate.
For example Mike and Asha bought a home together in 1994 which they lived in until 2008 when the they purchased another smaller property together as their main home renting out the former. Mike dies in February 2019 leaving his entire estate to Asha and she dies in June 2020 leaving her estate to their 4 children equally. The earlier purchased property is valued at £650,000 and the second property is valued at £250,000. Both properties qualify for RNRB but her estate must elect only one property to use the RNRB and TRNRB (£350,000) towards. Naturally the first property would be the optimal choice because in choosing the second would lose the full use of the relief; it being lower in value than the RNRB and TRNRB.
Contrast the above with the following subtle change, if Mike had bought the first home on his own for him and Asha to live in then Asha’s estate would not be able to elect that first property as a qualifying asset as Asha never lived in it whilst owning it; despite her owning it on Mike death.
Inheritance Tax Planning Points
• Planning would be desirable if :-
o your estate (net asset value) is more than £2,000,000.
o You have more than one qualifying residence.
o You wish to leave a property in a discretionary trust.
o If you have re-married after your first spouse died.
Contact our specialist team to see how we can help you plan for your circumstances. [contact link ]
NB: This article is for information only and must not be considered or relied upon as legal advice. The figures and law is as such July 2020 and does not incorporate subsequent changes.
NB: The above is information only and should not be used as legal advice on acted upon in such was. The law may have changed since this news bulletin was written.
June 2020