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The million dollar question – How to benefit most from the Residence Nil Rate Band?

5 years ago, possibly 5 days ago, the title to this blog would have been factually flawed. Chaos in Commons this month however means the million dollar question and million pound question are just about the same thing!

In both their 2010 and 2015 manifestos, the Conservative party promised to increase the Inheritance Tax (IHT) threshold to £1m between married couples. The Residence Nil Rate Band (RNRB) was consequently introduced in 2017, initially providing individuals with an additional £100,000 of IHT relief. This number has increased by £25,000 each year, with its final increase due next year. Whilst the government will have finally delivered their promise by 2020/21, in true government style, the headline does not quite tell the whole story.

What is the Residence Nil Rate Band and how is it transferred between estates?

In addition to the existing basic nil-rate band of £325,000, in 2020/21 each individual’s estate will be entitled to a further tax-free exemption of £175,000 on any residential property owned at the time of death. As a result, individuals could escape IHT on up to £500,000 of their estate.

As with the basic nil-rate band, the RNRB will be transferrable between spouses and civil partners on death. Any unused percentage of the RNRB from the estate of the first to die, regardless of whether the deceased owned any residential property, can be claimed by the estate of the surviving spouse or partner. If, for example, the first to die avoids using any of his/her basic nil-rate band, or RNRB, the entire £500,000 could be passed to the survivor. In those circumstances, the surviving partner’s estate could therefore be entitled to, as promised, £1m of their wealth being wholly exempt from IHT. 

Will my estate qualify for RNRB?

Should your estate not exceed £2m, your estate will be eligible for 100% RNRB. For any estates larger than £2m, your RNRB will be reduced by £1 for every £2 that your net estate exceeds £2m.

Who can benefit from my RNRB?

The RNRB is only available on estates in which the deceased’s main residence passes directly to children or linear descendants on death.

The RNRB however may be lost if the property is placed into a trust for the benefit of those children or grandchildren. Specialist professional advice should be sought to ensure the wording of the trust is such that the estate still benefits from any unused RNRB.

Estate planning advice should also be considered by those who own multiple residential properties as only one property will qualify for relief. In the absence of specific instructions, it will be down to the personal representatives to nominate which residential property should qualify. Importantly, the deceased must have lived in the property at some point during their lifetime as their main residence. RNRB will not be applicable to rental properties in which the deceased has never resided.

Without regular review, positive legislative changes can often have a negative impact on outdated wills. Should you require any further information on the RNRB or need any estate planning and inheritance tax advice, or to simply to have a free review of your will, please do not hesitate to contact a member of our team. Additional details can be found on the attached here.

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