Can I leave £1m with no tax?
When Boris Johnson was still the Mayor of London in 2016, you’ll remember an announcement that the inheritance tax threshold would be increased to £1m.
In reality, qualifying for the full allowance depends on satisfying all the following conditions:
being married or in a civil partnership, and
being a parent or step-parent, and
owning a property valued at more than £175,000, and
leaving your home to your spouse or civil partner
having a personal estate value of more than £500,000
not exceeding the annual gifting allowances.
If your personal wealth is more than £325,000 making a Will is essential to ensure the extra allowance can be claimed.
Read on for our straightforward explanation of the Residence Nil Rate Band (RNRB) and the key aspects of the legislation.
What is the residence nil rate band?
If a person dies on or after 6 April 2017, and the estate includes a qualifying residential interest (QRI) at their death and the QRI is closely inherited, then an additional maximum tax allowance of £175,000 (in 2022) could be claimed.
What is a Qualifying Residential Interest (QRI)?
The RNRB will apply to one property only where it is:
included in the deceased's estate and
was lived in at some stage by the deceased before their death.
Importantly, the home does not have to be, or have been, the main home and there is no minimum period for living in or owning the property.
A property that the deceased owned but never lived in (such as a property rented out to tenants) will not be eligible for the RNRB.
If the deceased owned more than one home, the personal representatives can nominate which property should qualify for the RNRB.
What does ‘closely inherited’ mean?
To qualify for the RNRB the property or share in it must be inherited by a lineal descendant. The following people are all lineal descendants:
a child, grandchild or other lineal descendant of that person
a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)
a child who is or was at any time that person's stepchild
an adopted child of that person
a child who was fostered at any time by that person
a child where that person is appointed as a guardian or special guardian for that child when they're under 18.
Importantly, a stepchild qualifies as a lineal descendant, but a stepchild does not inherit under intestacy. Another key reason to make a Will.
When is property inherited?
A property is inherited when a qualifying residential property which was owned by the deceased:
is closely inherited as an absolute gift, either by Will or under the intestacy rules, or
passes by survivorship to the co-owner, or
was gifted into a qualifying trust on death, any of:
an immediate post death interest trust (often called a life interest trust or property protective trust)
a disabled persons trust
a bereaved minors trust
18-25 trust, or
was given away in the deceased's lifetime but they continued to take a benefit and the gift was made to lineal descendants. A gift with a reservation of benefit (GROB) applies where the deceased continued to live in the gifted property, use the property as a holiday home or receive an income from it.
What is the ‘taper threshold’?
If the net estate is more than £2m the RNRB will be tapered.
The net figure is calculated by deducting liabilities but before any exemptions and reliefs (nil rate band, spouse exemption and business property relief or agricultural property relief). For every £2 over the threshold £1 is lost.
Estates with a net value in excess of £2.35 million will not benefit from the RNRB.
Can any unused RNRB be transferred?
Yes, the transferable RNRB works in the same way as the transferable nil rate band.
The amount to carry forward is a percentage of the RNRB of the surviving spouse or civil partner. If the predeceased spouse or civil partner died before 6 April 2017, the RNRB will not have been used so will be available to carry forward on death of the surviving spouse or civil partner, subject to the taper rules.
How is the home valued?
The value of the home for RNRB purposes will be the open market value less any liabilities secured on it.
If the value of the Qualifying Residential Interest is lower than the available RNRB then the relief is limited accordingly.
So, if the deceased’s residential property was valued at £140,000 this is the maximum RNRB available to their estate, unless the deceased had previously owned a more valuable property (see below for an explanation of the downsizing provisions).
What is downsizing?
In later life the family home may be sold to fund nursing care or to allow home owners to downsize to a smaller, perhaps more manageable, property. The downsizing provisions are intended to allow property to be released to the market without loss of RNRB relief, and avoid stockpiling.
The downsizing provisions apply to those who have downsized or sold a qualifying residential property on or after 8 July 2015. The RNRB remains available provided the value of the Qualifying Residential Interest (now held as cash or investments) is represented in the deceased's estate at their death and is closely inherited.
Do you have further questions?
Please feel free to message us here to arrange a time to discuss your personal circumstances in a confidential review.
