The Residence Nil Rate Band
We recommend that everyone should check their Wills to avoid missing out on a significant exemption to inheritance tax liability which could be worth up to £175,000 on an individual’s estate (or more for married couples or those in civil partnerships).
In April 2017 there was introduced the Residence Nil Rate Band exemption to inheritance tax payable and this means that many older Wills are out of date and will lose the benefit of this tax break.
Under this RNRB exemption, the estate of each individual can claim an additional allowance against inheritance tax of £100,000 in 2017 increasing by £25,000 each year to a maximum of £175,000 by April 2020 if their principal residence passes to their surviving spouse or other members of their immediate family (children and grandchildren).
This exemption is additional to the existing allowance of £325,000 exemption to which all estates are eligible.
The consequence for a couple is that their estates could be potentially tax free for £1 million once the individual exemptions and the RNRB exemptions are taken into account. However, there is a limit of £2 million to the full exemption so where the estate is worth more than £2 million individuals begin to lose the tax relief at the rate of £1 for every £2 over that limit.
For those who “downsize” or sell their home to fund care fees the benefit of this exemption is not lost. They may be entitled to an “inheritance tax credit” so that their estate gets a tax break equivalent to the value of their original home provided that the lower value property and the remaining proceeds of sale go to their immediate family members.
Where more than one property is owned the individual can select which is to be treated as their principal residence for this purpose (usually the most valuable) and state this in their Will. It does not have to be the property in which most time is spent but Buy-to-Let properties do not qualify.
The rules surrounding this tax can be quite complicated, in particular relating to “downsizing”, but the benefit for immediate members of the family significantly outweigh the potential losses for the estate.