Future foundations: focus on property (article 4)

Published by Jo White on 14 February 2019

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Claiming Residence Nil Rate Band when passing on your property

This article is the fourth in a series in which we focus on property issues in our bi-monthly e-newsletter for individuals and their families, Pathfinder – personal tax and wealth (sign up here). Over the next few editions of the e-newsletter we will further explore the most common property tax issues our clients are asking us about. Whether a landlord, or simply someone looking to utilise property as an investment for their (and their family’s) future, this series will seek to advise you on your options, and prevent you from falling foul of any unforeseen tax implications!

In this article we look at how Residence Nil Rate Band (RNRB) can potentially allow you to pass a proportion of the value of your home without paying any tax on its value…

Our home is normally our most valuable asset, whether this is in monetary or emotional terms. For a lot of individuals this means giving the next generation the option to keep this property in the family even if they later decide to sell it.

In April 2017 the government introduced a new Inheritance Tax (IHT) relief known as the Residence Nil Rate Band (RNRB). This relief potentially allows you to pass a proportion of the value of your home without paying any tax on its value. However, as with most reliefs the devil is in the detail.

To qualify for the RNRB strict conditions must be complied with, being:

  • The home must be an interest in a residential property that must have been occupied by the deceased at some time during their ownership, and;
  • the property must be left to children (including step, adopted and foster children), grandchildren and spouses, or widows or widowers of any of the above.

Therefore, potentially a property which was once occupied but subsequently vacated or let to tenants, can qualify. The RNRB may not be available where you leave the property in trust for the qualifying persons benefit. Where a property is left to a mix of direct descendants and other relatives or friends, the tax relief will be apportioned.

The current RNRB is £125,000 per individual with it increasing to £150,000 from 6 April 2019 and £175,000 from 6 April 2020. Together with the normal nil rate band of £325,000 this brings the total IHT free value to the £1 million per married couple or civil partnership that the government had previously promised.

One problem of the RNRB is that the relief is quickly tapered away if the estate exceeds £2 million. The value of the estate is calculated before any tax reliefs are deducted. Even if your other assets are not subject to IHT, due to the availability of Business property or Agricultural property reliefs, you may still not be entitled to this additional allowance. Like the nil rate band, any unused RNRB is transferrable on death of the first spouse or civil partner.

There are also special provisions which mean the relief applies where a person sells their home or downsizes to a less valuable property. However, beware, these rules are very complicated.

For the RNRB to apply, the value of the family home must be part of the estate and not given away in the seven years prior to death. It is important not to gift the family home if RNRB is to be used.

Whilst this relief will not be available to all, where your estate is around the £2 million it would be worth seeing if steps can be taken to ensure you get full benefit from this. Lifetime tax planning may achieve the desired result but specialist advice is always recommended.

Look out for the next property focussed article in April’s edition of Pathfinder – Personal tax and wealth update. To sign up to receive this complimentary bi-monthly newsletter, and other Kreston Reeves publications/event invitations, please click here. There is also the option to subscribe to receive our exclusive ‘property and construction’ sector updates, events and webinars for those with particular interest in this sector.

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