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What does the nil rate band really mean for me?

By January 26, 2018 February 12th, 2019 No Comments

Changes to inheritance tax (IHT) came in during 2017, affecting the allowance for those wanting to pass on their home to members of the family. But as the changes are being rolled out over the next few years up to the 2020/21 financial year, it can be hard to know if and how the changes will affect you.

The current amount you’re able to leave in your estate without incurring IHT is £325,000, known as the nil rate band (NRB). Anything above this amount incurs 40% tax, with certain exceptions, such as gifts to charities, being able to lower that percentage. Any transfers between spouses or civil partners are exempt from IHT even if your estate exceeds the NRB, with married or civil partnered couples having £650,000 – twice the NRB limit – to offset against their combined estate.

Introduced in April 2017, the residence nil rate band (RNRB) adds a further £100,000 to the NRB. This will then increase by £25,000 each year up to 2020/21, when it will reach £175,000. Each person will therefore have a maximum allowance of £500,000, with surviving spouses having an allowance of £1 million to offset against IHT when their partner’s allowance is transferred to them.

The RNRB differs from the NRB in that it doesn’t apply to lifetime transfers, such as transfers into trusts or gifts given by an individual within a period of seven years before they died. This means that whilst the NRB could potentially be consumed through gift-giving in the last seven years of a person’s life, the RNRB would still be fully available.

Back in 2015, when the RNRB was first discussed, there were concerns over discouraging older couples from downsizing or selling their home to move in with a relative or to residential care. Since then, however, the rules have been readjusted so that the allowance can still be utilised by those who sell up or move to a smaller home before their death, as long as the deceased leaves the downsized property or equivalent valued assets to their direct descendants.

Whilst there’s no limit on how much time passes between the downsizing or property sale and death, the transaction needs to have taken place after 7th July 2015 in order to qualify. RNRB also only applies to one property which the deceased needs to have lived in at some point before dying, meaning that buy-to-let properties or those in discretionary trusts don’t apply. If the deceased owned multiple homes, personal representatives are able to nominate which property should qualify for RNRB.

It’s also important not to fall into ‘the sibling trap’ – leaving a home to a sibling rather than a direct descendant such as a son or daughter, which disqualifies them from being able to use the RNRB.

If you have any questions about the residence nil rate band or any other financial matter, then please contact your usual Cullen Wealth consultant or call 0161 975 6700.