What you need to consider when planning for later lifeDec 09, 2020
Alice Carter-Tyler answers some frequently asked questions about inheritance tax and the Residence Nil Rate Band (RNRB):
What is the Residence Nil Rate Band and how does it affect inheritance tax?
As a general rule every individual has a Nil Rate Band of £325,000. This acts as an allowance above which inheritance tax is chargeable at 40%. It’s important to note that spouses or civil partners can pass assets to each other of any value without incurring inheritance tax. There are also some special rules for Business and Agricultural assets.
The RNRB aims to assist individuals in passing their family home to their descendants. Having first been introduced in 2017, the value of the allowance from 6 April 2020 is £175,000. This is where it is now capped.
When it comes to inheritance tax, how does the Residence Nil Rate Band work?
The RNRB allows an individual to pass their interest in their main residence to their descendants. These include children, stepchildren, foster children and the children of those individuals for example, grandchildren. As the RNRB only applies towards the individual’s share in their home if that share was worth £150,000 then the additional £25,000 of the allowance would be lost and cannot be set against other assets of the estate.
What if you pass your estate to your spouse or civil partner?
If you’re married or in a civil partnership and would like to pass your full estate (including your interest in your jointly held property) to that person then you can also pass your unused RNRB to them. Then, when they die, (provided that they pass the estate to either of your mutual descendants) both allowances can be combined. These can be set against the value of the home.
According to the RNRB, the person must have held the property as their main residence at some stage during their ownership. If for example you wanted to pass your deceased spouse’s former flat to their grandchildren and the rest of your estate to your nephews and nieces, the RNRB could not be set against that flat as you will never have owned it.
Can you benefit if you’re not married to your partner?
To transfer your RNRB to your partner, you must be married or in a civil partnership when you die. This also applies should you wish to use it to benefit your partner’s children or grandchildren. It’s therefore important to review your Will and understand your options on how to utilise the RNRB for your descendants.
What if your spouse has already died?
Any unused RNRB can be transferred to the surviving spouse. This means that you would benefit from your own allowance and the unused allowance of your spouse.
What if you have already sold your house when you die?
It may be that you downsize to a smaller and more manageable property or sell your home completely before you die. In this case it is still possible to benefit from the RNRB as long as the sale proceeds or the less valuable home and other assets of equivalent value are left to your direct descendants.
It’s important to remember that the sale of the home must have happened after 8 July 2015. The individual must also have died after 6 April 2017.
Can you benefit from the RNRB allowance, regardless of the size of your estate?
Where an individual’s estate exceeds £2 million the RNRB reduces by £1 for every £2 over £2 million. This is based on the size of the estate at the date the individual dies. If they provided gifts that reduced the size of their estate below £2 million in the period leading up to their death then this would allow them to benefit from the allowance.
We can also offer advice on certain types of trust. These would seek to reduce the size of the estate of the survivor of you or your spouse.
Should you review your Will?
It is a good idea to review your Will at significant stages in your life and when there are key changes in the allowances available to you to ensure that your Will meets your circumstances and that you don’t fall foul of any traps associated with the wording of the allowance. For example if you place an age contingency on any gifts of your home to grandchildren and you die while they are under that age then it is considered that the gift is looked after by your Executors and not given directly to your grandchildren so the allowance will not be available for that proportion of your estate.
At Nash & Co Solicitors, we’re currently offering appointments at a distance. This can be done over the telephone or by video calling. By doing this, we would still be able to review your Will with you. Please contact our Wills, Trust and Probate team as follows. You can reach Alice Carter Tyler on (01752) 827027 or at [email protected]. David Cornelius can be contacted on (01752) 827076 or at [email protected]. We would be very happy to talk you through your circumstances.