The New Inheritance Tax Relief – Don’t Miss Out!
The Inheritance Tax Residence Nil Rate Band (RNRB) will be phased in from 6 April 2017. Its purpose is to reduce the tax payable by estates on or after that date, but a spouse’s earlier death might still trigger a tax saving.
When might this apply?
The residence nil rate band (RNRB) is a completely new tax relief which is being phased in to lower inheritance tax (IHT) bills for estates which include a property that was occupied as a home by the deceased. It will also apply where the estate includes money from the sale of the deceased’s home during their lifetime. The starting amount of the RNRB will be £100,000. It then increases annually by £25,000 so that by 6 April 2020 it will be £175,000. However, in some situations the RNRB could be up to twice that amount.
Like the IHT general nil rate band, amounts unused by the first spouse to die will be available to use against the surviving spouse’s estate. The transferable amount is worked out as a percentage of the maximum RNRB on the first death. The percentage is used to calculate the transferable RNRB at the time of the second spouse’s death.
Example. In April 2017 Harry dies. He was married to Sally at the time. They jointly owned and lived in a house worth £600,000 at Harry’s death. Harry left his whole estate to Sally, which is an exempt transfer for IHT purposes, and therefore Harry used none of his RNRB. In 2021 Sally dies and leaves the house (now worth £700,000) to her children and grandchildren. Her estate is entitled to £175,000 RNRB, plus Harry’s unused RNRB. The transferable amount is 100% of the amount at the time of Sally’s death (not Harry’s), i.e. another £175,000. Therefore, up to £350,000 of Sally’s estate in respect of her home is charged at 0% IHT. Note. The RNRB has no effect on the general nil rate band.
The full amount of RNRB (and transferable RNRB) is only allowed for transfers on death where the net value of the estate is worth less than £2 million. It’s scaled down for more valuable estates. Plus, the home must be passed to one or more direct descendants, e.g. children.
RNRB is also allowed where the deceased sold their home and retained some or all of the proceeds in their estate at the time of death. Special rules apply which we’ll look at in another article.
Obtaining The Transferable RNRB
The RNRB doesn’t require a special claim and executors should automatically take it into account when they complete the IHT forms for an estate. However, the transferable RNRB must be claimed. This would usually be done when completing the IHT forms, but a claim can be made at any time up to two years from the end of the month following the deceased’s death. This time limit can sometimes be extended.
Tip. A death prior to 6 April 2017 can affect a later claim for RNRB. If a person dies and their estate qualifies for the RNRB, and their spouse died before 6 April 2017, the RNRB on the second death can be increased. For example, Bill died in 2015 leaving everything to his wife Mary, who dies in 2020. Because her estate qualifies for RNRB of £175,000, the executors can claim £175,000 transferable RNRB in respect of Bill’s estate.
Where one spouse dies and their estate doesn’t use their RNRB, it can be used against their spouse’s estate. To obtain this so-called transferable RNRB, a claim doesn’t need to be made until the second spouse dies. The transferable RNRB can be claimed even where the first spouse died before 6 April 2017.