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Inheritance Tax: What You Need to Know About the Residence Nil Rate Band

In October 2018, The Times reported that families in west London pay more in inheritance than anywhere else in the British Isles, with the amount now averaging an eye-watering £390,000.  Given the rocketing value of homes, especially in the South East of the UK, this will come as no surprise to many.  Indeed, according to a freedom of information request by Direct Line insurance, for just 118 estates, inheritance tax payable amounted to the tidy sum of £46m for the exchequer.  

What is clear is that, to date, the threshold at which inheritance is payable has not kept pace with rising house price inflation, resulting in many more families being pulled into the purview of the taxman; to the tune of £5.2bn in one year to be precise, which is over 60% more than five years previous.  

15 December 2018
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Giving beneficiaries a further tax-break

In 2017, the Government responded to the grumblings of increasing numbers of families paying inheritance tax by introducing the Residence Nil Rate Band (RNRB); a band which adds to the standard nil-rate threshold for inheritance tax.

The standard nil-rate band represents the base level at which inheritance tax is payable, and this has been frozen since 2009 at £325,000 per person.  The current RNRB threshold is £125,000, which will increase incrementally to £175,000 in 2021.

Therefore, an individual who died after 6th April 2017, no inheritance would be due on the first £450,000 (£325,000 + £125,000).  It is important to understand that when calculating the effect of RNRB, this threshold will be either the value of the home or the maximum threshold – in other words, if the house is worth less than the threshold, the house value would be used.

RNRB is only applicable where inheritance is being passed down to direct descendants, which according to the Government’s website includes:

  • a child, grandchild or another lineal descendant
  • a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

The definition of ‘child’ also includes:

  • a child who is, or was at any time, their step-child
  • an adopted child
  • a child who was fostered at any time by them
  • a child where they’re appointed as a guardian or special guardian when the child is under 18

How is RNRB calculated?

Let’s take a straightforward scenario example.  If Colin dies in the year 2018/19, and leaves a house worth £250,000 in addition to other assets and savings of £100,000, his total estate would be worth £350,000.  Because the house is worth more than the £175,000 RNRB threshold for that year, the whole amount can be used.  This would leave £175,000 of remaining value, and as this is within the £325,000 standard inheritance tax threshold, no tax would be payable.  Also, this leaves £150,000 of the standard threshold unused, which can be transferred to Colin’s surviving spouse or civil partner.

There are many other situations for which it can be highly beneficial to seek the advice of a specialist in the field of inheritance.

What is tapering?

Tapering only becomes applicable to the inheritance of very high-value estates.  Where the value of an estate exceeds £2m, the HMRC determines that the RNRB allowance should be reduced by £1 for every £2 over this amount.  In real terms, this means that for estates with a value of over £2.2m, no RNRB would be attracted.  However, this will increase as the thresholds rise each year.  It is therefore important for those in such situations to seek advice from an inheritance tax specialist who can outline the other options available, such as lifetime gifting and Will trusts.

In summary

Inheritance tax rules can be deeply complex.  It is important to seek specialist advice to ensure the rules regarding RNRB are being interpreted in relation to your exact circumstances, thereby giving you the confidence that what you intend to pass to your direct descendants will not be subjected to an unexpected bill from the tax man.  As with all matters relating to Wills, by making sure you are prepared for the sake of your family, you can rest assured you have done all you can to protect your legacy.

Please note, this article does not constitute legal advice.  

Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey.  We have a highly experienced private client team who can assist you with all matters relating to inheritance tax.  To make an appointment, please call us on 01932 840 111.