Tony Wickenden: Getting to grips with the residence nil-rate band

Tony Wickenden

Over the past couple of weeks I have been comparing pension-related headlines with the reality of the legislation supporting them and discovering some pretty big differences.

Another misleading headline is the one that claims no couple with a combined estate of less than £1m should have to pay inheritance tax. There is detail to consider.

What we have is not a nil-rate band of £500,000 for all but, in addition to the frozen standard nil-rate band of £325,000, a new dedicated residence nil-rate band to be introduced from April 2017 predominantly to protect the main residence from inheritance tax. The most important points of the new RNRB are as follows:

1. It will be phased in gradually between 6 April 2017 and 6 April 2020 on the following basis:

  • £100,000 for the tax year 2017/18
  • £125,000 for the tax year 2018/19
  • £150,000 for the tax year 2019/20
  • £175,000 for the tax year 2020/21 and will increase in line with the CPI in subsequent years.

2. It can be offset against the value of the owner’s interest in a property, which, at some point, has been occupied by the owner as a residence. It will be available when an owner dies on or after 6 April 2017 and their interest in it is transferred to direct descendants.

3. The transfer must be on death and can be made by will, under intestacy or as a result of the rule of survivorship.

4. In general, the transfer must be outright but certain other transfers into trust on death are permitted: for example, bare trusts, IPDI trusts, and 18-to-25 trusts and trusts for bereaved minors.

5. Special rules will be introduced to protect those who downsize. How this will work is currently subject to consultation.

6. Where the value of the deceased’s estate exceeds £2m (after deducting liabilities but before reliefs and exemptions) the RNRB will be reduced by £1 for every £2 excess value. It is important not to underestimate the “before reliefs” part of this condition. It means you ignore business property relief and agricultural property relief, for example, which could make quite a difference.

7. The £2m threshold and the RNRB are due to increase in line with the CPI from 6 April 2021.

8. Where death occurs after 5 April 2017, the deceased’s RNRB will be set off against any chargeable transfers of a residence before the set off against the standard nil rate band.

9. Any RNRB that is not used on first death can be transferred to a surviving spouse or civil partner. This is the case regardless of whether the deceased could have used their RNRB or not. The amount unused will be applied to uplift the survivor’s RNRB entitlement on second death. For example:

  • Husband dies in 2020/21 and leaves his share in the residence, valued at £87,500, to his children; balance of his estate to his wife
  • £87,500 of £175,000 RNRB set off against transfer
  • Extra 50 per cent RNRB to widow for possible set off on her subsequent death
  • Full standard NRB and transferable standard NRB also available

10. Where the first death occurrs before 6 April 2017, both the amount available for carry forward and the RNRB at the time of first death are deemed to be £100,000, thereby ensuring that, in these circumstances, the residence nil-rate band is always increased by 100 per cent on second death unless the estate of the first to die exceeded the taper threshold.
This is the case regardless of whether or not the estate of the first to die included a qualifying residential interest and irrespective of what dispositions occurred on their death.

11. When the first to die dies with an estate of more than £2m, entitlement to the RNRB is tapered away at the rate of £1 for every £2 of excess value. This applies on the first or second death and regardless of when the first death occurred. For example:

  • Husband dies in 2021/22 with an estate valued at £2.2m
  • Husband leaves the whole estate (including an interest in the main residence) to his wife
  • RNRB on first death is reduced by £100,000 (4/7) or 57.2 per cent
  • Transferable RNRB is 42.8 per cent
  • On the subsequent death of the widow, if she dies with an estate of £1.5m, she can use all of the standard NRB, 100 per cent transferable NRB, full RNRB and 42.8 per cent transferable RNRB

12. If both deaths occur before 6 April 2017, no RNRB is available to offset against the deceased’s estate.

13. If first death occurs before 6 April 2017, the RNRB is available for transfer if the subsequent death occurs after 5 April 2017.

So, quite a lot more to it than first meets the eye. And these are just the fundamentals. I will look at more details in a later article.

Tony Wickenden is joint managing director at Technical Connection