06th April 2018
Has your Inheritance Tax Allowance increased by £50,000 on 6 April 2018?The answer is that it may have done – and if it hasn’t you may be able to rearrange matters so that it does. The reason for this is an increase in the Residence Nil Rate Band – but, despite press reports to the contrary, the increase will not benefit everyone.
The Residence Nil Rate Band is an extra Inheritance Tax allowance, on top of the ordinary Nil Rate Band of £325,000, which applies to those who die after 6 April 2017 and leave an interest in a property (which they occupied as a residence at some point) to ‘direct descendants’. The term ‘direct descendants’ is widely drafted. As the words suggest, it includes children and grandchildren but it also extends to their spouses and to stepchildren.
For those dying between 6 April 2017 and 5 April 2018 the Residence Nil Rate Band was £100,000. For those dying after 6 April 2018 but before 5 April 2019 it increases to £125,000. That’s a potential extra £25,000 of allowance. However, that can be doubled for couples.
It is transferable between spouses in the same way as the ordinary Nil Rate Band of £325,000, and as a result, a married couple or civil partners may now have a Residence Nil Rate Band of £250,000 on the second death (twice the Residence Nil Rate Band of an individual) as well as an ordinary Nil Rate Band of £650,000 (twice the ordinary Nil Rate Band of an individual).
It follows that the increase in the Residence Nil Rate Band from 6 April 2018 will give individuals a total Nil Rate Band of £450,000 and married couples a total Nil Rate Band of £900,000. Only the excess in the estate over and above the Nil Rate Band will be subject to Inheritance Tax.
Further increases in the level of the Residence Nil Rate Band are planned, as set out below.
From 6.4.19 £150,000 (or £300,000 for married couples/civil partners)
From 6.4.20 £175,000 (or £350,000 for married couples/civil partners)
Several years ago the government pledged to introduce a Nil Rate Band of £1 million and by 6 April 2020 many (but not all) married couples/civil partners will be able to leave £1 million to their children or grandchildren free of Inheritance Tax.
The Residence Nil Rate Band is a potentially valuable allowance which can significantly reduce or eliminate the Inheritance Tax payable on an otherwise taxable estate. Unfortunately it is also very complex and subject to a number of conditions and limitations. For example, those who do not have children or grandchildren (or stepchildren) will not benefit from the Residence Nil Rate Band at all.
Some of the traps, however, can be avoided. Those whose estates are over £2 million will have the benefit of the allowance reduced or entirely disallowed depending on the size of their estate, but some people can rearrange their Wills to avoid losing the RNRB. Where property is left to children or grandchildren in trust, there are limitations on the trusts which qualify for the allowance. Where property is left on discretionary trusts the allowance will not apply (although it may be possible to rearrange matters in the 2 years following a death to obtain the benefit of the relief).
If you would like advice on whether the Residence Nil Rate Band will apply to your estate and whether your Will might need to be updated to obtain the benefit of the allowance, please contact Jane Stebbings or Antonia Cooper.