As it stands, every person in the UK has an inheritance tax band of £325,000. Effectively, all estates in the UK are free of inheritance tax (IHT) liability up until this value and all portions of an estate above this level are charged inheritance tax at a rate of 40%.
However, from 6th April 2017 there is an important change to the law which, in effect, may further reduce the inheritance tax liability of many estates
The Residence Nil Rate Band (RNRB)
The Residence Nil Rate Band (RNRB) introduces an additional nil rate band in cases where family property is left to any of the following parties:
- A spouse or civil partner
- A child, including an adopted child, a step child or foster child
- A grandchild of a deceased child
- The widow or widower of a deceased child who has not remarried
Following its introduction in April 2017 the RNRB will increase over four years before reaching a maximum of £175,000, at which point it will only increase in line with the consumer price index.
As such, over the coming years, the RNRB will be as follows:
- 2017/2018 - £100,000
- 2018/2019 - £125,000
- 2019/2020 - £150,000
- 2020/2021 - £175,000
Residence Nil Rate Band transfers
The full amount of RNRB is available only in cases of estates that do not exceed a value of £2,000,000. There is no entitlement at all for estates worth in excess of £2,200,000, although this limit will increase to £2,350,000 by 2020/21.
The RNRB will operate in conjunction with the normal nil rate band so that in cases where the two apply together up to £500,000 in assets may be passed on without incurring inheritance tax.
However, in reality, up to £1million may be passed on IHT-free. This is because the RNRB can be transferred in much the same way as the normal nil rate band.
What about when there are multiple properties?
RNRB may apply to a property other than a main residence. Executors or administrators may decide which property to apply the relief to. However, the issues around this may be complex, so it is vital that you seek advice from an experienced probate solicitor.
RNRB and discretionary trusts
The RNRB has largely made discretionary trusts irrelevant. However, in some cases the RNRB may still be applicable if the trust gives absolute interest or interest in possession to its beneficiaries. Similarly Bereaved Minor Trusts and Disabled Persons' Trusts also retain the benefit of the RNRB.
When the family home has been sold
It may be possible to apply the RNRB even if the family home has been sold prior to the death of the testator. This is particularly useful to those who have downsized or moved into care.
However, to be eligible for RNRB, the following must be shown:
- The property qualified for the RNRB had it not been sold.
- The subsequent property and/or assets will pass on to descendant
- The downsizing or disposal of the property occurred after 8 July 2015.
Probate solicitors specialising in RNRBs
Oratto's probate solicitor membership includes specialists in all inheritance tax issues, including Residence Nil Rate Bands and Residence Nil Rate Band transfers.
When you come to Oratto, our goal is to find you the solicitor who is best suited to your needs. Let us help you today.