Nil Rate Band

The Residence Nil Rate Band explained

The Residence Nil Rate Band (RNRB) comes into effect from April this year.

The Conservatives’ approach for the 2015 election promised to “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million.” The RNRB is the legislation that starts the first stage of this process and will soon come into effect on 6th April 2017. However it will not be quite as simple as the manifesto first sounded:

• The £1 million value – which is actually £500,000 per spouse/civil partner – will be introduced slowly over a number of years and the initial amount will be only £850,000.  This £850,000 will consist of the existing nil rate band of £325,000 plus the new RNRB of £100,000, for each spouse/partner.

• The RNRB will then increase annually by £25,000 in the following three tax years, so that it reaches the full £175,000 by 2020/21. During that time, the Nil Rate Band will remain frozen (it is not due to increase until at least April 2021).

 Large estates with a net value of over £2 million will be subject to a tapering reduction. The additional nil-rate band will be tapered away by £1 for every £2 by which the net value of the estate exceeds the £2 million figure.

 The RNRB only applies to gifts of residential property made on death (not during lifetime) to the deceased’s direct descendants. It is therefore not applicable to those who do not have any children/grandchildren, or those who wish to leave their home to someone who is not a direct descendant.

• There are rules included to ensure that the RNRB can still be applied if downsizing or moving into residential care occurs, but these are highly complex.

With the introduction of the RNRB imminent, it makes sense to review your estate planning now to discover what impact, if any, it may have. For example, it may require you to revise your will, or consider lifetime gifts to limit the impact of tapering. As the tax year end is approaching, why not add estate planning to your year-end review list?

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.