Inheritance Tax Planning: The Residence Nil-Rate Band (RNRB)

Inheritance tax (IHT) is one of the UK’s most detested taxes because, after working hard your entire life, the Government takes a final bite of your estate after you have gone. But IHT may also be considered a ‘voluntary’ tax, since the right financial planning can ensure your estate legitimately pays the minimum amount of tax possible.

Inheritance Tax Planning: The Residence Nil-Rate Band (RNRB)
Nigel Barthorp

Nigel Barthorp

Registered Adviser and Partner

There are many ways you can mitigate this tax, such as putting assets into trust, gifting them to beneficiaries while you are still alive and surviving that gift by seven years – the ‘potentially exempt transfer’ rules – and even making regular payments to someone while you are alive, providing your standard of living is not affected. We discuss some IHT saving tips in a previous article.

That said, there are clearly many people who are failing to take advantage of these estate and inheritance planning opportunities to reduce their IHT bill. The IHT receipts for the Government continue to rise, albeit more slowly than in recent years, with the Treasury reaping £4.9 billion from estates in 2016/17, up 4% on the previous year, according to official figures. This is a significant amount of money, much of which could collectively be left to beneficiaries instead.

In 2016 the Government introduced some changes to help you minimise your tax liability:

Residence Nil Rate Band (RNRB)

The biggest new relief is the residence nil rate band (RNRB), which lifts the total amount you can pass on to your beneficiaries without incurring IHT, from £325,000 to £500,000 by 2020/21 – but this additional £175,000 relates only to your main residence.

The current RNRB for 2017/18 is £100,000 and this will rise to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. This additional allowance can be transferred to your spouse in full if you do not use it, but it will only apply to your estate if you or your spouse pass a property to your direct descendants. So, if you have no child, step-child, adopted or foster child, no extra allowance applies.

As an example of the effect of the RNRB, if you pass away and all of your assets pass to your spouse or civil partner then, as of 2020/21, he or she –– would be able to pass on a total of £1m worth of assets to your children, including your main residence, without them having to pay any IHT.

Tapering of the RNRB for high-value estates

It is important to understand that anyone with an estate worth more than £2m sees this additional allowance removed at a rate of £1 for every £2 over this £2m threshold whether they have children or not. So, any estates worth over £2.2m this year would not benefit from the RNRB, rising to £2.35m by 2020/21. This tapering has now placed even more emphasis on the importance of IHT planning on the death of the first spouse. Strategies around this area are beyond the scope of this article and require professional assistance.

If you do not own a property when you die (see downsizing below), or you do not have any children, then the RNRB may not apply to your estate at all.

One further point to note is that, although investments qualifying for Business Property Relief, Agricultural Property Relief and AIM shares within an estate may not be subject to IHT, the value of the investments is taken into consideration when calculating the value of the estate. Therefore, these investments will also need to be taken into consideration for estates valued over £2m. 

Downsizing

Some people will look to release money from their home as they get older by downsizing, and if you have done this since July 8, 2015, you may still be able to benefit from some of the RNRB. There are provisions in place to compensate estates that could have lost out on some or part of the residence nil-rate band by the deceased having moved to a lower value property. In such cases, an ‘additional’ nil rate band will apply which is broadly equivalent to the residence nil-rate band available had the deceased not downsized. However, this compensatory amount only applies if the new (lower value) residence plus other assets are passed to direct decedents.

For those heavily reliant on downsizing as the main source of financial support later in life, all the costs involved should be considered, as you can often be left with a lot less than you think.

Summary

There are many strategies that one can employ to help mitigate IHT, some much more complicated than others. IHT planning never follows a ‘one size fits all’ approach but careful forward planning can help to reduce an unwanted tax bill. If you think you might be affected by the reduction in the RNRB because your estate is worth more than £2m, or would like to find out how to mitigate the IHT bill on your estate, please contact us.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. The information contained herein has been obtained from sources believed to be reliable but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest/disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.