From 6th April 2017, a new tax allowance has been introduced by the Conservative Government in order to meet David Cameron’s promise prior to the 2010 election of raising the tax threshold to £1M. Rather than raising the tax threshold from £325,000 to £500,000, the Government has introduced a complex piece of legislation with numerous restrictive conditions meaning that you might not qualify for the new allowance, called the Residential Nil Rate Band (RNRB).
The RNRB will be available for residences inherited by direct descendants in addition to the existing Nil Rate Band (NRB). The RNRB allowance starts at £100,000 rising £25,000 as a year until it reaches £175,000 thereafter it is frozen at this value until at least 2025/26.
2017/18 – £100,000
2018/19 – £125,000
2019/20 – £150,000
2020/21 – £175,000
2021/22 – £175,000
2022/23 – £175,000
2023/24 – £175,000
As with the NRB, any unused allowance can be transferred to a surviving spouse or Civil Partner with the effect that the combined IHT threshold for such couples will be a total of £1M by 6/4/2020.
For all deaths, prior to 6th April 2017, a deceased spouse or Civil Partner is assumed to have an unused allowance of £100,000 which can be transferred and used against the survivor’s estate on their subsequent death. As with the Transferable Nil Rate Band the transferable allowance is expressed as a percentage, so strictly speaking an amount of £100,000 isn’t transferred, it’s just the £100,000 is the denominator by which this percentage is calculated.
In general terms, the RNRB may available to be claimed where you had an interest in a property which had been used as a residence and it or its proceeds of the sale is
Although the above statement looks simple enough, the legislation needs clarification as summarised below.
The corollary to the above is that the RNRB cannot be claimed if:
For the property to qualify it must be left on your death. This does not mean that it can only be left by your Will; the RNRB may still apply on intestacy or where a joint property passes by survivorship. For clarification, the property doesn’t need to be mentioned/gifted explicitly within the Will, it can simply be gifted with the residue of the estate along with all your other possessions.
The RNRB does not apply to lifetime gifts, regardless of when the property was gifted. However, if the deceased retained a benefit in the property then the RNRB will be available for the property as long as it had been given to direct descendants; this will be a Gift with Reservation of Benefit (GROB) so the property value would still be included within the estate of the deceased.
You must have owned a property and used the property as your residence at some point during your ownership. If you owned more than one property at the date of your death then your executors or personal representatives (PRs) can nominate which property is to benefit from the RNRB and the property does not have to have been your main residence. But, if you own a portfolio of Buy-To-Lets, say, but have never lived in any of them then none of them can be selected by your PRs. Additionally, if the value of the selected property is less than the RNRB then the PRs cannot select another to ‘top up’ – you will simply lose the unused allowance.
The value of the property for RNRB purposes will always be its open market value less any liabilities secured on it such as a mortgage. Therefore, as above, if the property equity is below the RNRB then the unused allowance will be lost.
Strangely the term direct descendant is widely defined. It includes children, grandchildren and remoter descendants as you’d expect. However, it also includes step-children, foster children and the spouse or Civil Partner or a surviving widow/er or surviving Civil Partner who has not remarried, of a direct descendant.
The property doesn’t have to be left directly to direct descendants, it can be left on trust – but it has to be the right sort of trust! Certain trusts qualify, others don’t. Trusts that qualify are life interest trusts, bereaved minor trusts, 18-25 trusts for your children or a disabled person’s trust. All other trusts don’t qualify including discretionary trusts and trusts for grandchildren that do not receive the property outright on death.
The RNRB will be tapered away for estates over £2M; for every £2 your estate exceeds this threshold then £1 is deducted from the allowance. As a result in 2020/21, an estate over £2.35M will not benefit from the RNRB at all. For married couples or Civil Partners then the taper relief applies to both deaths. So, if the estate value on first death exceeds £2.35M then there is no transferable allowance to be able to be claimed on the second death. If the RNRB can be transferred but if the value of the estate on second death exceeds £2.7M then the whole RNRB is lost.
Important Note: The value of the estate used in the calculation of any taper relief is simply the gross value minus debts. Any reliefs of exemptions, such as assets qualifying for business property relief or agricultural property relief, are not deducted.
If you’ve sold your property (rather than gifted it as above) then you may still qualify for the RNRB if your direct descendants are left some of your estates outright or on permitted trusts. There are complex downsizing rules and formulae that are too complex to be included on this webpage so please have a look at the HMRC website for further details. Note: the downsizing rules only apply if you sold your property on or after 8th July 2015.