Inheritance tax: what should we expect from the new residential nil rate band?

The Finance (No. 2) Bill 2015 is shortly to receive Royal Assent and become law as the Finance (No. 2) Act 2015. But how will it affect you and your family? Private Client Consultant Solicitor Rose Phelps provides some commentary on the changes.

One of the Bill’s prominent provisions introduces the new inheritance tax Residential Nil Rate Band (RNRB) which may apply to the estate of someone who dies on or after 6 April 2017 in addition to the existing nil rate band and also the transferable nil rate band which has applied since 2007.

The band is worth £100,000 for a qualifying estate where the person dies between 6 April 2017 and 5 April 2018, increasing to £175,000 for a qualifying estate where the death is on or after 6 April 2020. The RNRB will not, however, apply to all estates as there are several conditions to be satisfied:

• The deceased must have had a “qualifying property interest”.This means one property, which is or has been their residence, and does not necessarily need to be their main residence, although the rules are detailed and each situation will need to be looked at carefully.
• The property must be “closely inherited”, as the Bill calls it (by will, or by the rules of intestacy where there is no will). This means the property passes to direct (lineal) descendants. There are some situations where although the only people inheriting are all direct descendants, the RNRB does not apply (e.g. the estate is held in trust for all the grandchildren at age 25). On the other hand, the definition of “descendant” is surprisingly wide and includes those who are adopted, step-children or foster children, and even their spouses/civil partners.
• The amount of the relief is limited to the value of the property (less charges on it).

Even if the estate does satisfy all the conditions for the allowance to apply, however, larger estates may not benefit at all because the allowance is capped when the estate (not the property itself) is worth more than £2m (a “taper relief” reduces the relief by £1 for every £2 above that £2m mark).

On the other hand the Bill includes a more benevolent provision so that where the person who dies on or after 6 April 2017 has already been widowed, their estate may also benefit from a transferable RNRB relating to their late spouse/civil partner and that is so even if the first death was before 6 April 2017, even many years before. More detailed provisions apply to this transferable allowance.

Although the allowance is worked out in relation to the actual property, the allowance does not “attach” to the property – it is applied in the inheritance tax computation for the whole estate, and so does not just work to the benefit of those who inherit the property.

The Government proposes to introduce further provisions relating to estates where the home has been sold before the death (e.g. to downsize or to move to residential care) and the proceeds of sale are “closely inherited”. The Chancellor’s Autumn Statement (and/or the Finance Bill 2016) should provide more detail on the RNRB in that situation.

This new inheritance tax allowance may be less welcomed by those who have no direct descendants, or who do not want to leave their property to them, or those who do not directly qualify for the RNRB. Nevertheless it is well worth examining now, in good time before it becomes effective, how the new provisions will work in practice.

Many clients will be keen to find out whether the additional inheritance tax allowance will reduce inheritance tax on their estate. In some cases careful estate planning can take advantage of the RNRB, or at least save the client from falling foul of the various conditions to which it is subject.