Martin Adams - Tax Partner at Ballards LLP

Transfers of assets between most married couples/civil partners in the UK are exempt from inheritance tax (IHT) whether made at death or during their lifetime.  At death transfers from an estate to other persons will generally be subject to IHT unless another relief, exemption or allowance can be set against the value of the transfer.

The nil rate band and the residential nil rate band

Most people living in the UK are entitled to a £325k exemption from IHT on their death, this is known as the ‘nil rate band’, or NRB.  If gifts have been made during the deceased’s lifetime – normally within seven years prior to death – the NRB available to be set against the deceased’s estate may be reduced.

In addition to the basic NRB entitlement, if a property has been used as a home at some time prior to death, then a taxpayer may have up to an additional £175k of tax-free allowance. This is known as the ‘residential nil rate band’, or RNRB.

For married couples (including civil partners) unused NRB or RNRB on the first death can be passed to the surviving spouse to provide additional IHT relief on the second death.

For example, on the second death of a married couple a maximum of £1m (£325k x 2 + £175k x 2) can be available where the maximum NRB and RNRB was transferred to that individual on the first death.

The RNRB main conditions

The RNRB is a generous relief and can broadly be claimed where:

  • The deceased owns a home at death, or in certain circumstances has sold a home (whether replaced or not) on or after 8 July 2015 (known as the downsizing provisions).
  • The home (or qualifying proceeds from a previous sale) must be left to one or more lineal descendants or their spouse/civil partner – some trust arrangements can benefit from the RNRB but not discretionary trusts.

Where the value of the estate (excluding any reliefs available) is more than £2m, the RNRB is abated at a rate of £1 for every £2 that the estate value is more than £2m.  Full abatement (and no entitlement to the RNRB) therefore arises at £2.35m on the first death, or £2.7m on the second death of a married couple if the full RNRB has been transferred to that spouse/civil partner on the first death.

Further RNRB considerations

Some points to note about the operation of RNRB are as follows:

  • The RNRB claimable is broadly the lower of the maximum entitlement to the RNRB and the value of the interest in the home at death, or the former home if the downsizing provisions apply, although the calculation is more complex in these circumstances.
  • It is the net value of the home (i.e. the property value less any mortgage) that is taken into account for the RNRB entitlement.
  • If more than one property qualifies for the RNRB at death, the personal representatives can choose which one should benefit from the relief.
  • If the property is left to a discretionary trust this will not qualify for the RNRB even if the beneficiaries are all lineal descendants. Age contingencies in wills may also not qualify for the RNRB.  Certain other trusts do qualify, including qualifying trusts set up by parents for minors and trusts for disabled persons.
  • If a married couple/civil partners jointly owns £4m of assets (£2m each) including a home, so that they both qualify for a full RNRB, but the first spouse to die passes all their assets to the surviving spouse, then on the second death if assets worth more than £2.7m are still held, the RNRB will not be available as it will be fully abated.
  • The RNRB can only be claimed at death, not on lifetime gifts.
  • If an estate exceeds the RNRB abatement threshold of £2m and a death is expected, then lifetime gifts calculated to drop the estate below this threshold may enable a  full RNRB claim to be made.

Next steps

This is a complex relief, and any planning will need to consider the effect of other taxes that may arise based on your personal circumstances.  Professional advice is essential to ensure that the optimum overall tax position is achieved.

If you have not considered your will provisions recently or if your circumstances have changed since your will was drafted, we recommend that an assessment is undertaken to ensure maximum value is passed to your legatees.

This note is intended for UK domiciled individuals only, if there are overseas aspects to your affairs different rules may apply and professional advice should be sought.

Please feel free to get in contact with Martin Adams at Ballards LLP for a free initial discussion.

Disclaimer

The above is not intended as professional advice and should not be taken as such. Each individual circumstance is different and you should seek advice from a qualified individual before acting.