Richard Coombs explains how the Residence Nil Rate Band and Inheritance Tax (IHT) apply to your family home.
“As many people know, everyone gets a “nil rate band” to use against the total value of their taxable estate when they die. Currently this is £325,000 and married couples, or those in civil partnerships, can transfer any unused allowance between themselves, meaning a combined allowance of £650,000.
With house prices continuing their inexorable rise, concerns were raised that the value of the nil rate band was gradually being eroded by the value of people’s homes – value which was never realised unless you sold up and rented or downsized. In fact, 80% of the growth in value of estates between 2010 and 2017 was due to the value of residential property. This led to more and more people being subject to IHT who would certainly not consider themselves “wealthy”, purely down to the value of their home. Indeed, in just the one year between 2015/16 and 2016/17 the number of people subject to IHT increased by an enormous 15%.
Accordingly, since 2017/18 the Government has extended this nil rate band for those who own their home and who leave it to their direct descendants. This additional band, the “residence nil rate band” (RNRB) has been gradually phased in as follows:
2017/18 £100,000
2018/19 £125,000
2019/20 £150,000
The final fixed increase will take effect from 6 April 2020 where the main residence nil rate band will be £175,000. From 6 April 2021 the band will only increase by inflation and therefore, in real terms, 2020/21 will see the maximum relief.
Like the normal nil rate band, married couples and civil partners can share RNRBs, meaning that a couple owning their own home will have a combined nil rate band of £1m to use against their estate, of which £350,000 can be used against the house only and £650,000 to use against the remainder (including the house). For the large majority of families in the UK this will take them out of the IHT net, and for wealthier families it will be a useful reduction in their overall IHT exposure.
Like most tax changes though, not everyone can benefit. For those with total estates which exceed £2m (including their home) there will be a tapered reduction in the RNRB, meaning the relief is reduced by £1 for every £2 of value over £2m. So for an individual, the RNRB will be reduced to zero for an estate over £2.35m and for a couple no additional relief will be given if the estate exceeds £2.7m.
For those that previously owned a house and either sold up or have downsized, there are provisions to ensure that they can still use the full RNRB. The rules are complex but essentially provided that you leave the smaller house, or assets equal to the same value, to your descendants then the full RNRB should still be available (subject still to the reductions made to estates worth over £2m).
What do I need to do?
RNRBs are easy to miss, and even more so where downsizing has occurred or an elderly relative has sold up in order to move into a residential care home. The downsizing rules outlined in the previous paragraph apply to disposals of property after 8 July 2015 and therefore one needs to look back nearly five years to see whether someone may qualify.
Going forward, executors and personal representatives will need to ensure that they have considered the RNRB rules so that the correct tax is paid. The rules can be complicated and therefore if you require any assistance please get in touch.”
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.