Residence Nil Rate Bands – How, what and when not.
The Residence Nil Rate Band (RNRB) was first introduced on the 6th April 2017 in what appeared to be an attempt to fulfil the governments promise of increasing the Nil Rate Band allowance (the amount you are able to give free of Inheritance Tax) on death to one million pounds. However, as we will look at, the RNRB is not as straight forward as most people would have liked and it will not be available to everyone.
When the RNRB was first induced in 2017, it allowed for an additional Nil Rate Band sum of £150,000 to be applied for on death, providing that certain conditions could be met. The main qualifying conditions are that the deceased owned a property when they died (or potentially the proceeds of a recent property sale) and that this is left to their ‘direct descendants’. ‘Direct descendants’ has quite a wide-ranging definition and fairly obviously includes children and grandchildren, but it also includes step-children and foster children amongst others. It does not, however, include remoter relatives like nieces and nephews or brothers and sisters.
Along with the introduction of the RNRB came the TRNRB (Transferable Residence Nil Rate Band). The TRNRB works almost identically to the TNRB (Transferable Nil Rate Band) and allows a spouse to pass on their available RNRB allowance to their surviving spouse, providing they pass on their property (or share of their property) to their surviving spouse when they die. This means that on the death of the surviving spouse, both of their RNRB allowances can be available, effectively doubling the single RNRB allowance on second death. This ensures that the RNRB of the first of the couple to die is not lost when property is transferred (often automatically) to a surviving spouse before being passed onto the children (or other descendants) on the second death of the couple.
Since its introduction, the RNRB amount has increased annually and in April this year increased to its maximum level of £175,000, increasing the combined RNRB and TRNRB potentially available to couples to £350,000. When added to the maximum NRB (Nil Rate Band) and TNRB which can be available (a total of £650,000) this combines to make the magic one-million-pound threshold promised.
This is good news for couples who meet the criteria but does not help people who don’t own a property or who have no children. It is also of no benefit to people who might want to leave their property to other relatives or loved ones outside of the definition of a ‘direct descendant’.
The RNRB has also faced criticism for being over complicated. Common scenarios like downsizing to a smaller property or selling a property before death to pay for care home fees results in some tricky calculations on the application paperwork. Large value estates may not be able to apply for a reduced allowance or may not be entitled to any RNRB at all.
Your available RNRB allowance can also be affected if you gift your property during your lifetime or if you leave your property in trust, either during your lifetime or on your death. Whenever you consider making any provision for your house either now or in the future, it is important that you don’t inadvertently lose your RNRB as a consequence.
The important thing to remember is that if you give away your property during your lifetime, you will no longer own your property and your executors (or administrators) will not be able to apply for a RNRB. This would also happen if you put your property into a discretionary trust during your lifetime, even if you and your spouse are included as potential beneficiaries of the trust.
Whenever you consider creating a trust it is best to obtain specialist advice so that you can discuss the benefits and any potential consequences. If your estate would meet the criteria and would benefit from the additional allowances that the RNRB and TRNRB can provide, then it is important that you discuss any effect creating a trust could have on this. It may be that there will be no effect if your estate is under the NRB threshold anyway and therefore you might not worry about being able to utilise the RNRB allowances on death. If you are considering setting up a discretionary trust, perhaps carving out the property and ensuring that your property will not form part of the trust, would be beneficial or perhaps a life interest trust would be more suitable.
A RNRB allowance can only be claimed against one property so if you own other properties then you may consider putting another property or properties in trust, keeping a property in your estate to allow for the application of your RNRB and potentially TRNRB allowance.
The best advice is always to obtain specialist advice when you are considering setting up a trust, whether this is in your lifetime or in your Will and to ensure that you are comfortable with any tax consequences that may arise as a result.