Inheritance tax benefits for homeowners

Take five guide - Inheritance tax benefits for homeowners    

If you are a homeowner, the Residence Nil Rate Band (RNRB) may well be relevant to you – it has been a hot topic since it came into effect on 6 April 2017. However, the rules are widely regarded as being unwieldy and complicated. Therefore, it really is important that you take proper Will and estate planning advice to ensure that you (and your family) do not miss out on the potential IHT benefits which the RNRB can offer.


1. What does the RNRB mean for homeowners?  

Broadly, individuals who are subject to IHT currently have an IHT-free allowance of £325,000. The allowance is known as the Nil Rate Band (NRB) and it can be transferred between spouses on death. This potentially results in £650,000 passing free of IHT to the beneficiaries of the estate of the second spouse to die. 

The RNRB is an additional IHT-free allowance which applies for deaths from 6 April 2017 onwards. In essence, the RNRB may apply where an individual leaves his or her home to direct beneficiaries (principally, his or her children and/or grandchildren). Depending on when the second spouse dies, a successful claim for the RNRB could allow between £100,000 and £350,000 to pass to the next generation free of IHT.   


2. What’s an example of this in practice?  

A husband died in June 2017 leaving his entire estate (including his share of the matrimonial home) worth £1.5 million to his wife. Because they are married there is no IHT liability and the husband’s full RNRB and his NRB are transferred to his wife. 

 The wife then dies in June 2020 leaving an estate worth £2 million (which includes the matrimonial home) to be divided equally between her two children. Her estate should normally benefit from a NRB of £650,000 (i.e. 2 x £325,000) and a RNRB of £350,000 (i.e. 2 x £175,000). Consequently, £1,000,000 will pass to the two children free of IHT.

3. How can I benefit from RNRB?    

To benefit from the RNRB an individual’s estate must include a “qualifying residential interest”; and the “qualifying residential interest” must be “closely inherited”. 


4. What does this mean?  

Qualifying residential interest 

A property will be a qualifying residential interest if the deceased lived there at some point during his/her period of ownership. It can even include a property held in a trust and lived in by a beneficiary of the trust. If an individual owns more than one property at death, his or her executors can nominate on which property the RNRB should be claimed. 

 Closely inherited - to be “closely inherited”, the property must be left to: 

 Direct descendants such as children (including stepchildren and adopted children) and grandchildren. Spouses and civil partners of the direct descendants (and, in the case of predeceasing direct descendants, widows/widowers who have not re-married).

If an individual’s estate is valued at over £2,000,000 at the time of their death then the available RNRB is reduced at a rate of £1 for every £2 by which the value of the estate is  above the £2,000,000 threshold. Consequently, it will not be available at all on certain high value estates. 

The RNRB may even be available where an individual does not own a property at the time of his or her death because he or she had disposed of it on or after 8 July 2015. For example, the RNRB may be available if the individual had sold his or her home to move into a residential care home or had downsized to a smaller property. Provided that the sold property was at one time a “qualifying residential interest” and the proceeds of sale are closely inherited, the benefit of the RNRB up to the value of the sold property can be claimed. 

5. What do I need to consider?      

The terms of a person’s Will often determine the extent to which the RNRB can be claimed. It is important to review your Will (or make one if you have not already done so) in order to take advantage of the maximum available RNRB in your circumstances. In particular, you should consider: who will inherit your home under the terms of your Will, whether your estate will benefit from the RNRB (for example, is your home a “qualifying residential interest” and is it “closely inherited”?) 

 If you think that your estate could be worth over £2,000,000 (i.e. the threshold above which the RNRB starts to reduce) at your death, you should seek advice on how effective succession planning can be implemented now to maximise the amount of the RNRB which can potentially be claimed. Remember to keep good records if you sell your home to move into a residential care home or downsize to a smaller property. 


Would you like to know more?

Please contact one of our expert lawyers in the Family Law sector here. Or contact us directly using our contact form below.


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