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Using the Residence Nil Rate Band to reduce Inheritance Tax Liabilities

20 Sep 2018

The substantial increase in property values that we’ve experienced over the last few decades and the increasing age profile of the UK population has meant that issues around Inheritance Tax are seldom far from the news headlines.

One of the most important recent developments in the field, – and one which hasn’t yet had a great deal of attention – was the introduction last April of the Residence Nil Rate Band (RNRB).

The RNRB is an additional relief which can reduce the Inheritance Tax payable on your death providing you leave your home to a direct descendant, such as a child.   Stepchildren also qualify for the relief.

The maximum RNRB available on an individual’s death is currently £125,000, but this figure is increasing year-on-year and will reach its maximum value of £175,000 in April 2020.

If your home is worth less than the maximum amount available, the RNRB available is capped at the value of your home.

This cap caused concerns before it was introduced that individuals may not sell their homes, or downsize, because this would result in some or all of their RNRB being lost.  To address this, the RNRB regulations state that, as long as certain conditions are met, you can still claim it on a property which you have sold or given away.

As per other Inheritance Tax reliefs, the RNRB is transferable between spouses and civil partners, which means if you were to leave your whole estate to your spouse, there would be no Inheritance Tax payable on your estate as it would be ‘spouse exempt’.

Rachael Leathley

On your spouse’s death, they could both benefit from their own RNRB, as long as they left their home to a direct lineal descendant, and also still claim the available RNRB from your estate.

While welcome, the RNRB is not without its potential pitfalls.  For example, unmarried couples may wish to capture it on the first death because it will not be transferable to their partner, while a will which includes Trusts which do not pass assets to direct lineal descendants can result in the RNRB being lost.

The RNRB can also be lost entirely because of the value of your assets, as it reduces by £1 for every £2 that the estate is worth over £2 million.  At today’s rates, the RNRB allowance tapers away altogether for an estate worth over £2,250,000.

Given the potential for Inheritance Tax savings available around the RNRB and other allowances, it is essential for people to seek early advice to ensure all relevant reliefs are captured.

At Hay & Kilner Law Firm, our Private Client team has extensive experience in preparing Wills, undertaking Inheritance Tax planning and finding the best possible solutions for each client’s individual requirements.

For more information on any of the above, or how we can help your business, please contact Rachael Leathley, or call 0191 232 8345.