A new complexity: the Residential Nil Rate Band
From April 2017, we have a new complexity in the tax system to cope with: the Residential Nil Rate Band. This is not down to our current Chancellor Mr Hammond: it was introduced by George Osborne in 2015 as a way of fulfilling a Tory manifesto promise to raise the Inheritance Tax threshold to £1 million without actually raising the tax threshold itself.
He did this by creating a new Residence Nil Rate Band (RNRB), which starts at £100,000 per individual in April 2017 and rises progressively to £175,000 in 2020-21. At that point, a married couple will each have their own Nil Rate Band of £325,000, plus the new RNRB of £175,000. Add both sets together and you get £1 million.
You might think this means a couple can leave £1 million of assets after 2020 with no inheritance tax to pay. Not so fast! There will in fact be lots of people who do not benefit fully or at all from the allowance and you may well be among them.
You only get the allowance if you leave a house to a lineal descendant (child, adopted child, their spouses and children). Childless couples don’t get any RNRB.
You only get the full allowance if you leave a house worth an amount equal to or greater than the RNRB. If the husband dies leaving everything to his wife and the wife later (after 2020) leaves a house worth £350,000 to her children, she gets the full RNRB of £175,000, and she inherits the RNRB from her dead husband to add to hers, just as she inherits his unused Nil Rate Band. So she has a potential RNRB of £350,000 and can use it all against the value of the house. But if the house was worth £200,000, that’s all the RNRB she could have.
If you die in 2017/18 with an estate worth over £2.2 million (assuming no transferable RNRB is available) you don’t get any RNRB, because if your net estate exceeds £2 million the allowance is tapered away at the rate of £1 for every £2 the estate exceeds £2 million.
People who have Wills that involve their houses passing into discretionary Trust won’t get the allowance.
Review, re-write, rant
For most people with estates over £650,000 it will be worth reviewing your situation. You may want to reconsider who gets the house and who gets other assets.
Tax experts have already pointed to absurdities. Suppose you have two buy-to-let properties (BTLs) that you have never lived in worth £150,000 each and a main residence worth £200,000, plus other assets of £600,000. Both the BTLs are subject to inheritance tax and can’t benefit from the RNRB. You’d be better off selling one of them and buying a bigger main residence. Doing that and adding £150,000 to your RNRB by 2020 would save you £60,000 in inheritance tax.
The downsizing rules (yes, there are lots of those too) add further inconsistencies – we will spare you the details. But it should be clear that if you want to get the benefit of the new allowance you may have to work quite hard for it. At the very least you will probably need a review and re-write of your Will.
And if the complexities of the RNRB, and the fact that it excludes so many people, drives you mad you could send a rant to your MP and the Chancellor.