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The Residence Nil Rate Band: Taking full advantage of the new inheritance tax allowance on the sale of your home

03 Mar 2017

Under the current inheritance tax rules, each individual is given a Nil Rate Band (‘NRB’) – that is a sum of money (currently £325,000) which can pass free of inheritance tax on their death. Transfers between spouses and civil partners are exempt from inheritance tax so if everything is left to the survivor of a marriage or civil partnership, none of the deceased’s NRB will be used. On the death of the surviving spouse or civil partner, it is possible for this unused NRB to be claimed and transferred to the survivor’s estate. This means that, at today’s rate, a surviving spouse may benefit from a total inheritance tax allowance of £650,000.

As we enter the new financial year in April 2017, new rules regarding inheritance tax are being introduced. In brief, these rules provide that in certain circumstances individuals may benefit from an additional Residence Nil Rate Band (‘RNRB’).

How much is the RNRB allowance?

The RNRB will be introduced in stages so that for the financial year 2017/18 the additional allowance available on a deceased’s home will be £100,000. This allowance will be increased over the next 3 years until it reaches £175,000 in the financial year 2020/21.

Under which circumstances will the RNRB apply?

The RNRB will only be available where a deceased leaves their home to lineal descendants (i.e children, step children, grandchildren and so on) and will also be transferable between spouses and civil partners as with the NRB referred to above.

Regardless of whether or not a deceased’s home passes to lineal descendants, the full RNRB may not be available where an estate is worth in excess of £2 million.

When the proposals for the new RNRB were being considered, a number of concerns were raised regarding the allowance attaching to an individual’s home. For instance, individuals may be less inclined to sell their property if doing so would result in losing some or all of their RNRB. To address this problem, it is possible for the RNRB to be claimed in circumstances where a deceased’s property has been sold. Examples include:

  • If an individual has sold their property and moved into a care home, the RNRB may still be available on their death;
  • Similarly, if an individual has downsized and as a result is not entitled to the full RNRB it may be possible to claim any ‘lost allowance’ if certain conditions are met.

What is the best way to take advantage of the RNRB on the sale of your home?

Practically, the rules regarding claiming the RNRB where a property has been disposed of will be difficult to implement unless the deceased has retained records of the property sale. Individuals acting in an estate will also need to be made aware of any historical property sales so they are able to claim the additional allowance accordingly. In view of these complexities, taking full advantage of the new inheritance tax rules requires planning and careful record keeping.

If you would like to discuss any of the points raised in this article, please contact Alice Clewes, Partner in our Private Client Team.

Call: 0191 232 8345

Email: alice.clewes@hay-kilner.co.uk