You may have heard in July 2015* that a new Residence Nil Rate Band (RNRB) will be introduced from April 2017 in order to increase the inheritance tax threshold for married couples with estates which include property. The main gist of the provision is that an individual will receive an additional tax band to the current Nil Rate Band of £325,000 which will be phased in as follows:
- £100,000 for 2017/18
- £125,000 for 2018/19
- £150,000 for 2019/20
- £175,000 for 2020/21
The above is subject to certain conditions including a tapering of the allowance for estates with a net value of more than £2 million, the property having to be a place of residence for the deceased and that it must pass to a direct descendant (this is a wide definition as it includes a step-child, adopted child or foster child of the deceased and if the lineal descendants predecease, their spouses will also qualify if they have not re-married). The value of the new Residence Nil Rate Band will also be limited to the net value of the interest in the property (i.e. less mortgages or liabilities).
For a married couple, any unused additional Residence Nil Rate Band can also be transferred to be used against the estate of the surviving spouse in the same way as the original nil rate band and therefore it is important to keep records of what happens to your property.
In the event of a person ‘downsizing’ after 8 July 2015, the value of surplus funds on the sale, which counted towards the Residence Nil Rate Band, is not lost and can be applied against other replacement assets which are being passed to a direct descendant, even though the actual provisions do not take effect until 6 April 2017. The death must be after 6 April 2017 however.
The provisions are very complicated and are still in draft form but for inheritance tax planning, it is advisable that any actions taken in relation to a property whether it is downsizing, gifting or selling should be documented in order for your executors to make the claim for the additional Residence Nil Rate Band with HMRC. Transactions in the form of a solicitor’s completion statement at the time of sale and/or purchase would be able to show the sale value and the value of any surplus to be passed on to direct descendants.
For more advice on inheritance tax or the new Residence Nil Rate Band, please contact Justine Clowes in our Private Client team on 01625 442148.
*You can read more about the original announcement for the nil rate band in our previous blog, Budget 2015: the Conservatives £1 million inheritance tax threshold.