April this year saw the introduction of the new residence nil-rate band (RNRB). As yet, the allowance has a low profile, but it is certainly worth consideration when planning how to pass on the family home.
The existing nil-rate band allows individuals to pass on assets worth up to £325,000 IHT-free. The new allowance provides an additional nil-rate band worth £100,000 (and more in future years – see box) when they leave an interest in a home to a direct descendant.
Direct descendants can include children, grandchildren, stepchildren, adopted and foster children, but not nephews, nieces and siblings.
Like the nil-rate band, the RNRB can be transferred between spouses and civil partners, meaning they can potentially pass on an estate worth up to £850,000, free of IHT. This will rise to £1 million in 2020.
Value of the additional nil-rate band:
- 2017-2018 - £100,000
- 2018-2019 - £125,000
- 2019-2020 - £150,000
- 2020-2021 - £175,000
However, anyone hoping to benefit from this new band should note the numerous conditions and complexities that come with it.
One complication relates to the use of trusts. Properties held in discretionary trusts – which are often used to hold assets for children – do not qualify for the RNRB. But some other trusts used for children may qualify, so expert advice will be essential here.
Another drawback is the tapered withdrawal of the RNRB for estates with a net value of over £2 million. With a withdrawal rate of £1 for every £2 over the threshold, an estate worth £2 million could get the full £100,000 RNRB, but an estate worth £2.2 million would lose it completely.
Other details to consider when planning to make use of the RNRB include: which residences qualify; what happens if you want to downsize or move into a care home; and the options if you want to share your estate between those counted as ‘direct descendants’ and those not.
A small slip on any of these details could lead to the loss of the RNRB, so careful planning is recommended.
If you would like advice on the new residential nil-rate band, please get in touch with a member of our private client team who would be happy to help.
