What is the Inheritance Tax Residence Nil Rate Band?

Author: Helena Luckhurst

Does UK Inheritance Tax (IHT) affect me?

IHT can pose a serious threat to family wealth. With careful planning, married couples (including civil partners for these purposes) can usually defer IHT until the death of the surviving spouse.  Then, however, IHT applies at a flat rate of 40%, although often only if the surviving spouse’s assets exceed £650,000 (it often depends upon the couple’s gifting history, in part).

IHT is a particular problem for Brits (or, to be absolutely precise, persons with a UK domicile). On death, UK domiciliaries are liable to IHT on their assets wherever situated in the world on death.  However, IHT mitigation is of increasing concern to non-UK domiciliaries too, as the UK Government seems intent on putting pressure on non-doms, through past and forthcoming changes to the UK tax system, to take their UK residential property out of offshore structures and into direct ownership.  Traditionally offshore structures have been used to protect UK situated assets, particularly UK property, from exposure to IHT.  However, increasingly, non-doms are more likely to own UK property directly and that means that non-doms will be interested in IHT mitigation planning too, as any UK situated assets owned by a non-dom at death are liable to IHT.

What is the Residence Nil Rate Band?

In conjunction with the standard IHT Nil Rate Band, the IHT Residence Nil Rate Band (RNRB) offers an opportunity for married couples to pass up to £1,000,000, free of IHT, to their heirs after the survivor’s death.  The RNRB is available for unmarried individuals too which, with the standard Nil Rate Band, allows them to pass up to £500,000 free of IHT.  These figures assume that the surviving spouse / the individual dies after 6 April 2020.  Between 6 April 2017 and 6 April 2020, the RNRB increases by £25,000 from a starting point of £100,000.  No RNRB is available on deaths prior to 6 April 2017.

By 2020, using the RNRB can result in an IHT saving of £140,000 for married couples or £70,000 for an individual. Contrary to what you may read in the papers, IHT is not an easy tax to mitigate, so savings of this order merit some consideration.

Is the RNRB available to everyone?

No, there are some conditions that need to be met. Essentially, at the time of your death, you need to be able to meet the following tests:

  • Your total wealth must not exceed £2,000,000, to enable the RNRB to be claimed by your estate in full. RNRB is potentially available for surviving spouses with estates worth up to £2,700,000 (£2,350,000 for unmarried individuals) but it tapers away by £1 for every £2 that the estate exceeds £2,000,000 on death. For these purposes, your wealth will include your share in any jointly owned assets and may include certain trust interests that you might have. You may also have inherited assets by the time of your death which have to be factored in.
  • Broadly speaking, you must have an interest in a residential property at your death. However, the Finance Act 2016 contains provisions allowing people who downsize from a larger property, or who cease to own a property altogether prior to death (perhaps because they have moved into care) to still benefit from the RNRB in certain situations.
  • The property interest must be inherited by lineal descendants. The legislation widens this definition beyond its obvious meaning of children and grandchildren (including adopted children) to include any children of whom the deceased was their guardian and a lineal descendant’s spouse or civil partner as well.
  • ‘Inherited’ in this context also extends beyond its literal meaning. Leaving a property interest to a lineal descendant outright in one’s Will certainly counts. However, giving the property interest into certain types of trust on death, of which the lineal descendant is the life tenant, or even making a gift with reservation of benefit of a property interest to a lineal descendant in lifetime – perhaps by giving away property and continuing to live in it rent free for example, so the gift is brought into account for IHT purposes on death, will also qualify. (Note that gifts of property to lineal descendants in lifetime which are not treated as gifts with reservation of benefit cannot attract the RNRB as they are not part of the giver’s estate on death. Lifetime gifts of property interests may jeopardise the RNRB on death, therefore.)

Is using the RNRB right for me?

The RNRB is an interesting development because it offers a way to save IHT which is safe and approved. You can be sure that taking advantage of the RNRB in the manner intended will never fall foul of counteraction measures such as the UK’s General Anti-Abuse Rule (GAAR) because the RNRB is provided for in the IHT legislation itself.

Of course, you have to want to leave at least a portion of your property interests to at least one of your lineal descendants in order to qualify. However, if you are concerned about doing so by way of an outright gift, because the recipient may be vulnerable or still financially immature by the time of your death, you can still qualify for the RNRB and allow responsible adults to retain control of the property interest by using the right kind of trust in your Will.

If your current Will leaves your assets in trust for your children after the surviving spouse’s death, you should get your Will reviewed now in case the trust will prevent the RNRB from applying. It is certainly not the case that all existing Will trusts for children prevent the RNRB from being available, though. It depends upon the precise wording of the Will trust.

For married couples, the £2,000,000 limit is tested in relation to the value of both the first-to-die’s assets and the surviving spouse’s assets. If the first-to-die’s assets exceed £2,000,000, the full RNRB will not be available on the second death. For some married couples, the problem will only arise on the surviving spouse’s death, as a result of the surviving spouse having inherited the first-to-die’s assets which, when combined with his or her own, leave the surviving spouse with assets in excess of £2,000,000 at his or her death. However, married couples with assets between, say, £2,000,000 – £3,000,000 plus should not assume that the RNRB is not for them. There are steps that can be taken to reduce the value of an estate below £2,000,000 for IHT purposes.

Successful IHT mitigation often requires a multi-faceted approach, in which having Wills tailored to your particular circumstances often plays a key part. If you are happy for your children or grandchildren to inherit your property and your wealth enables you to qualify for the RNRB, it makes sense to be sure that your current Will, which may well predate the announcement of the RNRB, will support a RNRB claim, rather than deny it.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)


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