Residence Nil Rate Band – the traps!

The Residence Nil Rate Band (RNRB) has been around now since April 2017 – longer than some people expected. The RNRB can be claimed where a person’s ‘qualifying residential interest’ (QRI), is inherited by a direct descendant.

The amount of available RNRB now stands at £175,000, but claiming it is not always straightforward and there are traps for the unwary.

When the legislation was introduced, it was labelled as the government making good on their promise to give individuals £1m worth of Inheritance Tax (IHT) allowances.

Whilst, in principle, the additional reliefs can do what was promised, there are a number of traps that you can fall into which may not lead to the intended result.

Estate planning

It is important to be aware that a QRI includes an interest in a dwelling-house which has been your residence. So, if you own multiple properties, provided that you had used the property as a home at some time before your death, your executors can claim the RNRB against the value of that property.

Closely inherited

To qualify for the RNRB, your QRI must be ‘closely’ inherited. What does this mean?

‘Closely’ means that the beneficiary receiving the property must be a lineal descendant, a spouse or civil partner of a lineal descendant, or a surviving spouse or civil partner of a lineal descendant who predeceased you, provided that they have not remarried.

The term ‘lineal descendant’ includes a child, stepchild, foster child, children subject to a special guardianship order and natural children who have been adopted by a third party.

However, it is important to be aware that, in order to be a stepchild, there must be a marriage or civil partnership between the step-parent and natural parent. The child of one cohabitee is not a stepchild of the other.

Inherited

To be able to claim the RNRB, a property must be inherited. This includes receiving a property by way of a disposition under the terms of a will, the intestacy rules or otherwise and even includes events such as property passing by survivorship or by way of a gift in expectation of death. However, it does not include the exercise of an executor’s power of appropriation.

As a result, how an estate is administered will affect the ability of the executors to claim the RNRB. If, for example, the will left a cash legacy to a child of the deceased and the executor appropriated the property to the child to satisfy this legacy, this is not treated as if the child has inherited the property.

Advice should be taken to ensure that executors and beneficiaries do not fall foul of these rules. A post-death variation of the will would be required.

It is also important to note that where property is left to certain types of trust, it is not treated as if the beneficiaries have inherited the assets. If you are currently administering an estate that includes a trust, it is important that you take appropriate legal advice within two years of the date of death to ensure that steps can be taken (where appropriate) to protect the estate’s right to benefit from the RNRB.

Taper threshold

The value of the available RNRB is reduced by £1 for every £2 that the value of a deceased’s estate exceeds £2m.

To ensure that the RNRB is not wasted, particularly where assets could be given away prior to death to reduce the value of your estate, planning should be considered as early as possible.

Lifetime transfers

The RNRB is only available to be claimed on death. It is not available to lifetime transfers.

For example, if a father gave his only property to his son in 2014 and then dies in 2020, even though the property is not chargeable to IHT because the father has survived the date of the gift by seven years, no RNRB will be available on his death.

However, there are two instances where an estate may benefit from the RNRB even where a residence has been given away, including where a person has downsized or where there has been a reservation of benefit by the deceased following a gift to a lineal descendant. Advice should be sought in these instances.