Bringing more estates into the scope of taxation
The advent of the ‘residence nil rate band’ (RNRB) has significantly simplified the process for certain individuals aiming to bequeath their family home. With property values on the rise across the UK, many find their estates surpassing the £325,000 ‘nil rate band’ (NRB) threshold for Inheritance Tax, thus bringing more estates into the scope of taxation.
Implemented on 6 April 2017, the RNRB introduces an additional nil rate band for individuals passing away post-6 April 2017 who leave a residence to their direct descendants. During the tax year of 2024/25, the maximum RNRB stands at £175,000. It’s important to note, similar to the standard NRB, any unutilised RNRB from the first deceased in a marital or registered civil partnership can be transferred to the surviving partner, irrespective of the first death occurring before the RNRB’s implementation date. However, the RNRB is subject to specific conditions, making it partially or entirely inaccessible for some.
Estate valuation and RNRB application
The RNRB is deducted from the taxable value of the deceased’s entire estate, not merely the property value, but it is limited to the value of the residence passed on to direct descendants. This differs from the existing NRB as it does not extend to transfers made during an individual’s lifetime. For married couples and registered civil partnerships, any remainder of the RNRB can be claimed by the surviving partner’s personal representatives, offering a reduction in their taxable estate.
Estates exceeding £2 million in value see a gradual reduction in the available RNRB, decreased by £1 for every £2 above the threshold. This includes provisions for those who have downsized or sold their property after 8 July 2015, ensuring they are not disadvantaged.
Considerations for lifetime gifts and estate thresholds
When assessing if an estate surpasses the £2 million mark, it’s crucial to disregard any reliefs or exemptions, meaning business relief and agricultural relief are not considered in the RNRB calculation, although they influence the Inheritance Tax liability. The valuation for the RNRB purposes focuses on the estate’s worth at the time of death, excluding any lifetime gifts, even those made within seven years of death, that are included in the Inheritance Tax assessment.
The RNRB allocation against an estate is the lesser between the inherited home or share’s value by direct descendants and the maximum RNRB available at the time of the individual’s passing.
Transference of unused RNRB between spouses
In instances where the property’s value falls below the maximum RNRB, the remaining allowance cannot be applied against other assets within the estate but can be transferred to the estate of a deceased spouse or registered civil partner upon their demise, provided they, too, left a residence to direct descendants.
Surviving spouses or registered civil partners are entitled to claim any unutilised RNRB from their deceased partner’s estate, enabling a potential reduction in their own estate’s taxable value.
Residential inheritance explained
The passage of a residence to direct descendants upon the second death occurring on or after 6 April 2017 is a matter of considerable importance. The descendant does not need to have inherited or owned the residence previously, provided they are a direct descendant of the deceased.
Qualifying residential interest
For a property to qualify under the Inheritance Tax RNRB, it must be ‘closely inherited’, meaning that the estate is passed directly to the deceased’s descendants.
Scope of direct descendants
Direct descendants encompass biological children, grandchildren, spouses of the child, grandchild or great grandchild, registered civil partners, and any step, adopted, or fostered children. It’s important to note, however, that nieces, nephews, siblings, and other relatives do not qualify under this definition. Without qualifying direct descendants, the RNRB cannot be utilised.
Claiming unused RNRB
Regardless of the timing of the first death, even prior to the introduction of RNRB, there is an opportunity to claim a deemed RNRB up to £175,000. This is subject to conditions, particularly if the estate of the first spouse or registered civil partner was valued over £2 million, which may affect the RNRB due to tapering rules.
Transferability and Deed of Variation
The RNRB allows for the transferability of unused bands between spouses and registered civil partners, capped at 100%. Additionally, direct descendants can inherit property through various legal means, including Wills, intestacy rules or deeds of variation, making such property part of their estate.
Selecting the main residence
The RNRB accommodates any property within the deceased’s estate that they resided in without insisting it is the primary residence. When multiple homes are part of an estate, the personal representatives can decide which property should benefit from the RNRB.
Trusts and the RNRB
The availability of RNRB for homes held in or transferred into trust at death is a nuanced area. The applicability of RNRB depends on the nature of the trust and whether it results in direct descendants inheriting the property. Given the complexity, HM Revenue & Customs advises consulting with a legal expert to navigate these waters.
Navigating the downsizing provision in estate planning
Estates that fall short of qualifying for the complete RNRB might be eligible for an additional allowance, known as the ‘downsizing addition’. This provision is applicable under specific circumstances: if the deceased had disposed of their primary residence, moved to a less valuable property or ceased to own a home altogether after the 8 July 2015. Additionally, the property in question must have been eligible for the RNRB at the time of the owner’s death, with a portion of the estate being inherited by direct descendants.
Scope and limitations of the downsizing addition
The essence of the downsizing addition is to compensate for the RNRB that would have been available had the individual retained ownership of the more valuable property up until their death. However, its applicability is subject to certain restrictions. Notably, it is not applicable if the value of the home owned by the deceased at the time of death exceeds the maximum RNRB threshold. Furthermore, the benefit derived from this provision is also limited by the value of other assets bequeathed to direct descendants.
Strategic considerations for estate holders
Even in cases where no new property is acquired post-disposal, the downsizing addition remains accessible, provided that other assets are left to direct descendants. The deceased’s personal representatives must lodge a claim for the downsizing addition within two years following the end of the month in which the death occurred.
Implementing Inheritance Tax planning techniques
Adopting strategic planning techniques is imperative for estates at risk of exceeding the Inheritance Tax threshold. These strategies, which should be integrated into the individual’s broader financial planning, aim to mitigate potential tax liabilities, thereby ensuring a maximised inheritance for direct descendants.
