Residence nil-rate band to increase today

As you’ll know, inheritance tax (IHT) is a tax that arises when assets pass from one owner to another, usually when someone dies and their assets are passed on to a family member.

There have been relatively few changes to IHT since 2009 – the threshold has remained the same at £325,000 per individual and it will remain the same as we go in to the new tax year, 2020 – 2021.

It’s worth noting that transfers to spouses and civil partners are exempt from IHT and any unused IHT threshold between spouses and civil partners is transferable, which means that a double IHT threshold of up to £650,000 can be available for the estate of the second person to die.

There is, however, an additional IHT threshold – the Residence Nil-Rate Band (RNRB) – which was introduced in April 2017 by the Government at an initial rate of £100,000 per individual. This has increased each year by £25,000 and in the tax year 2020-2021, it will reach its maximum threshold, £175,000 per individual.

The RNRB can be applied if you are leaving property that has been your main residence to your direct descendants.

Again, any unused RNRB between spouses is transferable which means that a RNRB of up to £350,000 can be available for the estate of the second person to die.

So what does this actually mean? In effect, if you are married or in a civil partnership (and have direct descendants) potentially up to £1 million of your estate can transfer to your direct descendants free of IHT.

Who are classed as “direct descendants”?

• A child, grandchild or other lineal descendant;
• A husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner);
• A child who is, or was at any time, a step-child;
• An adopted child;
• A child fostered at any time by the deceased;
• A child who was under the guardianship of the deceased.

What qualifies as a “main residence”?

RNRB will only be applied to one home in which the deceased must have owned and lived in – if the deceased owned and lived in more than one home, the executor of their will can choose which one to apply the RNRB to. A property owned by the deceased but never lived in by them, for example, a buy-to-let property, does not qualify.

There is additional guidance on the Government’s website.

A limit on RNRB

Where an estate is worth more than £2 million, the estate will be entitled to less of the RNRB. For every £2 that the estate is over £2,000,000, £1 of the RNRB is lost – this means that if your estate is worth £2,350,000 or more, the RNRB will not apply to your estate.

For further guidance on the RNRB or IHT, contact our friendly team at Harding Evans on 01633 244 233 (Newport office) or 02922 676818 (Cardiff office) or email us at hello@hardingevans.com.