Act Now, Save Tax Later: Your Estate and the Residential Nil Rate Band

New rules have just come in to force which could save you money on Inheritance Tax.

On 6th April 2017, it became possible to apply a Residential Nil Rate Band (RNRB) to your estate upon death. Using the RNRB can allow you to pass a greater amount to your loved ones without paying tax on it. Provided you meet the necessary conditions; this could mean a hefty saving on your Inheritance Tax bill.

We looked at the RNRB before, in December 2016. Now that the provisions are in force, however, it is even more important to consider how they could help your estate. There might be ways to re-organise your affairs and make best use of the RNRB, without changing the effect of your estate plans.

A quick recap: what is the RNRB?

The RNRB is a nil rate band which can be applied specifically to a property you have lived in.

There is already another nil rate band in Inheritance Tax law; one which allows the first £325,000 of your estate to be taxed at 0% upon death – a ‘nil rate’. As such, there will be no tax to pay on that first £325,000. Anything above this figure is taxed at 40% so large sums falling outside the nil rate band could make for a sizeable tax bill.

The RNRB is applied on top of the normal £325,000 nil rate band. The current RNRB is £100,000. Generally speaking, therefore, a qualifying individual will not be taxed on the first £425,000 of their estate. A number of things can alter these figures (such as using a previously unused part of a nil rate band transferred from a spouse’s estate) but this is the basic position.

However, there are restrictions for when the RNRB can be applied:

  • It can only be applied to one property.
  • The property in question must have been your home, at one time or another.
  • If your share of the property is worth less than £100,000, only the lower amount applies.
  • The property must be inherited by one or more of your direct descendants on your death (i.e. children, grandchildren, or their spouses or civil partners).
  • The total value of your estate must be £2 million or less. However, the possible RNRB applicable to your estate ‘tapers’ away above this threshold – rather than being a strict limit. As such, even if your estate is worth over £2 million, some of the RNRB may still apply.

For more detail on the RNRB and its conditions, have a look at our previous article.

Will the RNRB apply to my estate?

It will come as no surprise that the RNRB rules are complicated. Determining whether the RNRB will apply in your circumstances can be tricky. Here are some of the main things to bear in mind, however, when you are looking to take advantage of the RNRB.

Trusts in your Will

Some types of trust will prevent you from making use of the RNRB. This is because if you settle property in certain kinds of trust, that property is still treated as being part of your estate for tax purposes

One such type of trust is a discretionary trust. A discretionary trust is one in which the extent of the beneficiaries’ shares is not defined. Instead, the trustees have the power to decide how and when trust property is allocated to a ‘class’ of beneficiaries. For example, your Will may establish a discretionary trust which benefits ‘such of my grandchildren that reach the age of 21’. Any grandchildren that become 21 will go to form the class of beneficiaries.

If your home is included in a discretionary trust, in the vast majority of situations (there are some very specific exceptions), you will not be able to apply the RNRB to it. This is the case even if all other conditions are met and the only possible beneficiaries are direct descendants (as in the above example). This is because, technically speaking, the beneficiaries do not inherit the property upon your death – it is at your trustees’ discretion when, or even if, they receive the benefit of the property.

However, by contrast, a life interest trust (or interest in possession trust) could allow you to apply the RNRB. An example would be: passing your home to your direct descendants on trust with the condition that you are entitled to live there during your lifetime. Because the trust property will still form part of your estate upon your death (for tax purposes) the RNRB can be applied. Of course, all of the other requirements of the RNRB must still be met for it to apply.

Naturally, this is just scratching the surface. If you are at all unclear about how any trusts you have, or you intend to make, would affect your eligibility for the RNRB, it is strongly recommended that you seek specialist legal advice.

Have you updated your Will?

If you have any questions about your Will, or you wish to update your Will (even if we did not originally write it), please contact us.

Lifetime Gifts

Inheritance Tax rules mean that certain lifetime gifts can be included in your tax calculation. Gifts made within the last 7 years of someone’s life could be considered as though their value still formed part of that person’s estate.

The ‘normal’ nil rate band of £325,000 can be applied to these gifts just as it can to any other estate property. However, the RNRB cannot. So if you were to gift your home away and you then died within 7 years time, the home’s value (or a part of it) could still be included in your estate. However, your estate would not be able to make use of the RNRB – even if all other conditions for the RNRB were met.

This is also the case for any lifetime transfers into trust of your home, unless the nature of the trust means that the trust property will still form part of your estate for Inheritance Tax purposes.

Downsizing or selling your home

However, if you sell or downsize your home during your lifetime, you could still benefit from the RNRB. Again, there are conditions which apply:

  • At least a share of your estate is to be inherited by a direct descendant.
  • You downsized or disposed of your home on or after 8thJuly 2015.
  • The home you sold would have been eligible for the RNRB if it had been kept until your death.

In general, the amount of RNRB applicable is limited to the amount of RNRB ‘lost’ to your estate through downsizing. It cannot be more than the RNRB which would have applied had the downsizing not taken place, however.

What should I do?

Have a think about your plans and whether they are affected by anything discussed in this article. Is there anything you could do differently to take advantage of the RNRB?

The Government has recently released an online calculator to assist with determining the total nil rate band to be applied. However, it may be of limited help to people planning how they can take advantage of the RNRB. Instead, it is aimed more at helping people who are administering an estate.

If you are at all unsure, you should contact a specialist practitioner to guide you through these new provisions. For the sake of a few changes, you might be able to save yourself a lot of money, passing it to your loved ones instead of the tax man.

If you would like to get a general idea of how much tax may be expected to come due on your estate, take a look at our quick and simple inheritance tax calculator.

Need further help?

If you would like to discuss any of the topics raised in this article, please do not hesitate to contact us.

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