The introduction of the RNRB was announced in the press in such a way to suggest assets of up to £1,000,000 would be able to be given away free of Inheritance Tax. This indeed will be possible for many people but not for all.
Each individual already had available to them a tax free sum on death, currently of £325,000. Since 2007 it has been possible for married couples and civil partners to be able to transfer an unused nil rate band to the surviving spouse or civil partner, so that on the second death their estate may have available to them two nil rate bands, a total of £650,000.
The RNRB has added to these reliefs so that by the tax year 2020/2021 a further £175,000 will in certain circumstances be able to pass tax free. An unused RNRB may also be transferred to a surviving spouse or civil partner, so that a total of £1,000,000 may be able to pass free of Inheritance Tax, a saving of £400,000.
The introduction of the RNRB has created unfairness and difficulties, some of which can be overcome by planning how your will should be prepared or by varying the terms of the will post-death, where this is possible.
The effect of the RNRB is that the deceased must have a residence or had a residence. The property need not necessarily be the deceased’s main residence nor even necessarily in the UK, provided that the property has been the deceased’s residence at some point during their ownership. The relief can apply where the deceased has downsized or even sold the property entirely, as long as they have done so after 8 July 2015.
Therefore, this extra relief is not available to people who have never owned a residence or have sold their residence before 8 July 2015. It does also not apply if a person gifts their property during their lifetime.
The relief is only available in full to an estate where the value of the estate is £2,000,000 or less. In circumstances where the value of the estate is higher it may be possible to make lifetime gifts of assets other than the property in order to bring the value down to obtain the relief, even if the value of the gifts remains in the Inheritance Tax net at death.
The RNRB only applies if the residence is inherited by a close relative. Whilst the definitions of what constitutes a close relative are fairly widely drafted, they do not for example include nephews and nieces. This means many people will not be able to take advantage of the extra reliefs.
How a property is inherited can also cause problems and may result in the relief being unavailable without careful planning. If children are left the whole of a deceased’s estate on the death of their parent, then claiming the relief is generally straightforward. However, situations arise which may result in the relief being lost. For example, a will prepared with the residuary estate being left into a discretionary trust, perhaps for protection purposes, even if the only beneficiaries of the trust are the deceased’s children, will not qualify for the relief. It may be possible to obtain the relief by planning post-death.
The complicated rules surrounding the availability of the relief means it is essential to take advice when making a will to consider the implications of what it is you want to do. Where a will has already been prepared it is also sensible to take advice to see if anything can be done post-death to obtain the relief even if initially it is thought to be unavailable.