Residential Nil Rate Band

October 2015 Newsletter on new legislation relating to a new tax threshold on the home – the Residential Nil Rate Band.

Welcome to our October 2015 Newsletter.  In this newsletter we discuss new legislation relating to a new tax threshold on the home – the Residential Nil Rate Band.

If you wish to download the newsletter in PDF please click on the link below.

PDF Icon October 2015 Newsletter

The good and bad news of the new Residential Nil Rate Band (RNRB)

In the Summer Budget 2015, the government announced it will phase in a new residence nil-rate band (RNRB) from 6 April 2017 when a residence is passed on death to a direct descendant. It will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

It will then rise in line with the Consumer Price Index (CPI) from 2021 to 2022.

The intention is to reduce the burden of Inheritance Tax for most families by making it easier to pass on the family home to direct descendants (including step-children) without a tax charge, so that by 2020 homes up to the value of one million could pass tax-free to children and descendants. This would utilise a couple’s current Nil Rate Bands of £325K each and the maximum RNRB of £175K each, making a total of £1million.

The existing nil-rate band (NRB) will remain at £325,000 until the end of 2020-21.

However, there is a sting in the tail with the additional benefit of the RNRB in that there will be a tapered withdrawal of the value of the RNRB for estates with a net value of more than £2million. This will be at a withdrawal rate of £1 for every £2 over the £2millon threshold. Therefore estates that have a value of £2.35 million will not benefit from the RNRB whatsoever.

For couples with larger estates effective inheritance tax planning is now even more important to ensure that the estate on 2nd death doesn’t exceed the £2.35m value so the extra benefit of the RNRB is not lost. Basic Wills which leave everything to the surviving spouse on 1st death will not necessarily achieve this. Also, tax-planning options on other assets which could bypass the spouse/civil partner on 1st death (such as insurance proceeds, death in service benefits and lump sum pension death benefits) should definitely be considered.

Note that estates that pass to beneficiaries other than direct descendants will not benefit from the RNRB and as with the existing NRB, the new RNRB cannot be transferred between couples who are not married or civil partnered for use on 2nd death. Therefore planning recommendations for cohabiting couples is to preserve the benefit of both of these allowances for use on 2nd death so the extra the allowance is not lost. (Note that a ‘direct descendant’ will be a child and their lineal descendants where ‘child’ includes, unlike all other pieces of related legislation, step-children and foster children.)

The government also announced that legislation would be included in Finance Bill 2016 to make sure that those who wish to downsize to a less valuable property or cease to own their own home are not discouraged from doing so.

Note that the rules around the RNRB are still subject to government “tweaking” until it becomes law, and is not effective until April 2017, so there may be additional factors to consider which we will endeavor to keep our readers informed of in good time.

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