The Inheritance Tax residence nil rate band – are you sure you qualify?

From 6 April 2017, the standard inheritance tax nil rate band, which is currently £325,000, was enhanced by an additional “residence nil rate band” (RNRB). This was designed to be fulfilment of the Conservative party’s promise to increase the inheritance tax nil rate band to £500,000 per individual or £1 million per couple.

The RNRB is available where residential property is left to direct descendants. For these purposes a direct descendant means a child, or a remoter lineal descendant such as a grandchild or a great grandchild. It is also interesting to note that the definition of “child” for the purposes of the RNRB includes stepchildren and foster children.

The RNRB has some interesting wrinkles. Here are just a few of them:

• The home does not have to have been the deceased’s main residence or to have been lived in for a minimum period. It can be any property which the deceased occupied at some stage prior to death so long as it included in the death estate.
• If the deceased person owned two or more homes, the personal representatives can nominate which one should qualify for the RNRB.
• The home does not have to be situated in the UK although it must be within the scope of UK inheritance tax and included in the deceased’s estate.
• The home does not have to actually end up in the hands of the direct descendants. The RNRB will still be available if the personal representatives sell the property as part of the administration of the estate and only pass the sale proceeds onto the direct descendants.

So far so good. Unfortunately, the RNRB legislation has a very nasty sting in the tail.

It has a “taper threshold” of £2 million.

If the value of a person’s estate at the date of death exceeds £2 million, the available RNRB is reduced by £1 for every £2 of the excess. So, if the value of an estate exceeds £2,350,000 there is no RNRB available at all.

The nasty sting applies to the calculation of the taper threshold. The £2 million is calculated before taking into account any exemptions or reliefs whatsoever. This includes Business Relief and Agricultural Relief.

What this means is that an individual who owns a business, whether it’s a company, partnership or a sole tradership, or who owns agricultural property may believe that they will qualify for the RNRB and may have factored it into their estate planning when in fact no relief is available at all.

At Friend Partnership we recommend that you re-examine the availability of the RNRB. This may prompt you to revisit or accelerate succession planning and lifetime giving for maximum inheritance tax efficiency.

Friend Partnership are inheritance tax and estate planning specialists. If you have any concerns or if you need professional advice, contact David Gillies by email at david.gillies@friendllp.com or by phone on 0121 633 2000.