The New Residence Nil Rate Band: How will it benefit me?
Within the Summer Budget of 2015 came the announcement of the Residence Nil Rate Band (RNRB) which will come into force in April 2017. It aims to reduce the tax bill for families and make it easier to pass property onto descendants, to include children, grandchildren and their spouses as well as step children, adopted and fostered children and children for whom the testator was appointed a guardian.
The effect of the RNRB
The RNRB will be applicable when a property is passed on to lineal descendants, and will be able to be used by anyone who has passed away after 6 April 2017, however a widowed spouse who dies after this date may also claim their late spouse’s RNRB on top of their own.
From 6 April 2017, each homeowner will be able to claim £100,000 RNRB to use as a relief against their dwelling. This shall rise each year by £25,000 until 2021, when each homeowner will have £175,000 RNRB. Therefore, a married couple who own a property and are leaving that property to their children will have a Nil Rate Band of £650,000 and a RNRB to use against their property of £350,000 (£1,000,000 allowance in total).
Any person owning over £2,000,000 worth of assets will have their RNRB tapered off, at the rate of £1 for every £2 over £2m.
How will it work?
Example:
John’s Estate Mary’s Estate
House £250,000 £250,000
Cash £250,000 £250,000
Total £500,000 £500,000
- John dies in November 2017 leaving his whole estate to his wife Mary
- Mary’s estate has now doubled and is worth £1,000,000
- Mary dies in March 2021 leaving her entire estate to her children
House £500,000
(Less John’s RNRB) (£175,000)
(Less Mary’s RNRB) (£175,000)
Total £150,000
Plus the Cash £500,000
Total £650,000
Less John’s NRB (£325,000)
Less Mary’s NRB (£325,000)
Total = £0.00 x40% = NO INHERITANCE TAX TO PAY
The residence nil rate band may be lost where, for example, the property is placed into a Discretionary Will Trust for the benefit of the children or grandchildren.
However, some Trusts for the benefit for children and grandchildren will not result in a loss of the allowance. Trusts such as Absolute Interest or Interest in Possession Trusts will retain the additional nil rate band.
It makes sense to keep Wills constantly under review to cater for changing circumstances. And that also includes ensuring legislative change does not adversely impact upon what the deceased would have wanted. Missing out on the RNRB, by passing the family home into a Discretionary Trust, could see their executors paying as much as an extra £140,000 in Inheritance Tax.
If you would like advice on Inheritance Tax and how it may effect your Will please contact a member of the Lawson-West Wills and Probate team on 01858 445480. We can arrange an appointment to see you at one of our three offices in Leicester, Wigston and Market Harborough.
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