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Will the Residence Nil Rate Band result in an Inheritance Tax saving for you?

22 Nov 2017

As you may know, the new Residence Nil Rate Band (“RNRB”) was introduced in April 2017. The new rules provide that if you leave your home to a direct descendant such as a child or stepchild, you may be entitled to an additional relief which can reduce the potential Inheritance Tax payable on your death. This is the RNRB. The maximum RNRB available is currently £100,000 but is set to increase year on year until April 2020 when it reaches £175,000. If your home is worth less than the maximum amount available, then the RNRB available to you is capped at the value of your home.

As long as certain conditions are met, you can still claim some or all of the RNRB even if you have sold your home. There are also circumstances where the RNRB can be lost entirely because of the value of your other assets.

This is because if your estate is worth over £2 million, the RNRB available is reduced by £1 for every £2 that the estate is over £2 million. This means (at today’s rates) if your estate is worth £2.2 million or over, you will lose all your RNRB. When considering the value of your estate for these purposes you need to ignore any Inheritance Tax reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR) which can be claimed on farm land or business assets. This means that whilst your farming assets will hopefully pass free of Inheritance Tax due to APR or BPR, the value of those assets may result in some or all of the RNRB being tapered away. If the RNRB has been tapered away, it will not be available to offset against your other non-business assets which are not eligible for reliefs.

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Is this a problem for you?  If your farming assets are worth over £2 million but are all used for agricultural or business purposes then you may not need any RNRB because of the reliefs available. If some of your assets will not qualify for APR or BPR you may not need the RNRB because the existing Nil Rate Band (currently £325,000) is sufficient to cover those assets. However, if you have assets of over £2 million – within your farming business or otherwise – it is certainly worthwhile reviewing your Inheritance Tax planning to  preserve the RNRB where possible. For instance, if APR is denied on a farmhouse, the RNRB could serve to mitigate any subsequent Inheritance Tax liability providing it is available to claim.

With high land prices it is not unusual for a farm to be valued at over £2 million. The RNRB will not help these landowners unless some planning is considered prior to death.  Whilst the RNRB has been a welcome addition to mitigating Inheritance Tax, the rules have a number of pitfalls and you may need to consider these to ensure you will maximise this additional relief.

For further information, please contact Alison on 0191 232 8345 / Email: alison.hall@hay-kilner.co.uk