From April 2017, a new relief called the residence nil rate band (RNRB), for inheritance tax (IHT), is being phased in.
The maximum RNRB limit for the year to 5 April 2018 is £100,000 and this will increase in stages each year up to a maximum of £175,000 by 6 April 2020. This limit will be tapered if the net value of the deceased’s estate is above £2M.
The RNRB available for relief is the lower of the ‘limit’ and the value of the property that is inherited by the direct descendants.
The RNRB is added to a deceased individual’s IHT threshold (currently £325,000) if they pass on a residential property included in their estate (which they must have lived in at some point in their lives) to ‘direct descendants’.
In general, direct descendants include children and grandchildren in addition to their spouse or civil partner. Note that the term ‘children’ extends to step children, and children who are fostered or adopted. It does not, however, include other close relatives such as siblings, nieces and nephews.
If the deceased owned more than one home, an election should be made to select the home which qualifies for the relief.
If all or part of the threshold is unused it cannot be taken into account to cover other transfers that may become chargeable on death or gifts to trusts.
Generally, in most cases, a percentage of any unused RNRB can be transferred from the deceased to the surviving spouse or civil partner but there are some exceptional circumstances where this will not apply.
As with any tax relief, there are one or two conditions that need to be met, particularly to obtain the benefit of the double relief for spouses. Also the introduction of this relief can cut across what had become a ‘standard’ tax planning exercise of leaving the deceased spouse’s interest in the property to a trust. In many cases this will lead to the waste of a valuable relief and so is a matter that should be reviewed.
To summarise, we welcome this introduction and are pleased to say that potentially up to £40,000 of IHT can be saved by an estate with effect from today. If an estate relates to a surviving spouse or civil partner, the saving can be up to £80,000 for the year to 5 April 2018.
This is potentially an extremely valuable relief so if you would like more information on this please contact us.