Category: Business, Financial Planning, Investment management, Thought pieces

The Residence Nil Rate Band (RNRB for short) was announced in the 2015 summer budget and came into effect on 6th April 2017. Despite the fact this was introduced almost two and a half years ago, it’s still an area of confusion for the majority of people. In this Question and Answer session, our Chairman Keith Thompson (KWT), delves deeper in to how this inheritance tax allowance works by asking one of our senior paraplanners, Emma Nunnerley (EN), a series of questions.

Question (KWT): What is the residence nil-rate band?

Answer (EN): This is an additional inheritance tax allowance that applies to individuals on death when passing their main residence to a direct descendant. It applies to individuals who have an estate, including a main residence, that exceeds the inheritance tax threshold (nil rate band) currently £325,000.

Q: How much additional nil-rate band is available?

A: The amount available has been increasing each tax year. For the current tax year (2019/20), it is worth an additional £150,000 per person. This will increase to £175,000 in the 2020/21 tax year and will then increase annually with the Consumer Price Index (CPI) thereafter. This means that there will be a potential total nil rate band of £500,000 per person, (£325,000 nil rate band + £175,000 RNRB) or £1million per couple from 2020/21, on which no inheritance tax is payable.

Q: What is meant by ‘direct descendants’?

A: This refers to children (stepchildren, adopted children and foster children are also eligible) and grandchildren. Individuals falling under the ‘direct descendant’ category can utilise, in full or in part, the RNRB when inheriting a property.

Nieces, nephews and siblings do not fall under HMRC’s definition of ‘direct descendant’ and therefore are ineligible to use this allowance.

Q: What if my Will leaves everything to a Trust rather than direct to individuals?

A: If the Will leaves everything to a Discretionary Trust, the estate will not automatically qualify for the RNRB; even if the beneficiaries are limited to direct descendants. However, if the Trustees appoint the property out of the Trust to direct descendants within two years of death, the RNRB could potentially still be claimed. Some trusts, however, such as bare trusts, immediate post death interest trusts and bereaved minors’ trusts can use the RNRB.

Q: What if I own more than one property?

A: To qualify for the RNRB, it is a necessity to have held a “qualifying residential interest” at some point. This means that you will need to have owned or had part ownership of the property in question during your lifetime. If you have two qualifying residential interests, then your personal representatives can nominate which property will utilise the RNRB. However, you cannot offset the allowance against other types of property such as investment properties or buy to let property.

Q: What if I downsize or sell my home?

A: The RNRB is also available when you downsize or cease to own a home on or after the 8th July 2015. Assets of an equivalent value, up to the value of the additional residential nil-rate band, can be passed to direct descendants on death.

Q: What happens if I don’t pass my property straight to my children on first death – can any unused allowance be transferred?

A: Yes – if a property passes from say husband to wife on first death, the survivor’s estate can ultimately claim any unused RNRB. Likewise, the survivor’s estate can also inherit any of the standard NRB that is unused making the maximum combined allowances available, £1million.

Q: Does the RNRB apply to everyone?

A: It is reduced for estates with a net value of more than £2million at a rate of £1 for every £2 over £2million. So, for an individual who only has one RNRB (not inherited any RNRB from spouse) and has an estate with a net value of £2.3 million or above, there will be no RNRB.

Q: What is meant by ‘net’ value?

A: The net value of an estate is the total value of all your assets, less any outstanding debt; regardless of whether they themselves are exempt from inheritance tax. So, for example, businesses and agricultural assets that are (not in all cases) excluded from an inheritance tax perspective would still be included when determining your RNRB eligibility. As a result of this, a lot of people do not qualify for the RNRB.

Pensions, as well as failed Potentially Exempt Transfers (PETs) and Charitable Lifetime Transfers (CLTs) are however exempt and not included in the net value of your estate.

Q: How can Clarion help?

A: Estate planning is an integral part of Clarion’s financial planning process and regardless of whether you qualify for RNRB or not, helping you to manage and mitigate your inheritance tax position to protect your legacy for your loved ones is always high on our agenda. As part of our ongoing reviews and annual planning meetings, we monitor and review the overall value of your estate and we can help you to see how this might evolve over time and how your inheritance tax position can change.

Using our lifetime cash flow analysis, opportunities for gifting, trust planning and philanthropy

can be explored to reduce the overall tax liability and in some cases allow the estate to qualify

for RNRB in the future.

Regular and structured reviews are essential

If you’d like more information about this article, or any other aspect of our true lifelong financial planning, we’d be happy to hear from you. Please call +44 (0)1625 466 360 or email enquiries@clarionwealth.co.uk.

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