INHERITANCE TAX – RNRB EXPLAINED | Residence nil rate band and downsizing
The Residence nil rate band- also known as the additional threshold, or RNRB – is an exemption that can be applied to an estate at the point where it is taxed. It has only recently been introduced, so you may not have heard of it yet; but takes some time to get up to date with it, because it could save you a lot of money. Because it could save you so much, we’ve put together a few hints on how to take advantage of it, and a few facts that you might not be aware of that will help you navigate the confusing landscape of inheritance tax.
When can you make use of the RNRB?
The RNRB only applies under specific circumstances, but they don’t exclude all that many people: first things first, the person who owns the estate must have died either on or after the date of April 6th, 2017. If the estate was passed on before this date, then the threshold doesn’t apply no matter what. But the only other circumstances are that the person passing on the estate owned a home that they’re giving to one or more of their direct descendants; there are a large number of landlords in the U.K. that this applies to, so the RNRB is going to become a very important form of tax relief, very soon.
The only other point is that the estate must have been worth less than £2 million. For estates above that amount, the band is tapered down by £1 for every £2 that the band is exceeded. There’s also a stipulation that the band only applies to one residential property, although the executors of the estate can choose which property to apply the RNRB to. The residence must also have been occupied by the deceased at some point in time. The rules aren’t too complicated, although since they have only just been introduced, news of the changes is only just filtering through into public knowledge; so it’s entirely possible that you may be eligible to pay less tax on your inheritance than before.
How much can you save because of the RNRB?
The RNRB threshold is currently set at £100,000, but this is set to increase by £25,000 each tax year, reaching and staying at £175,000 in the 2020-2021 tax years. In addition, any of the thresholds that aren’t used when someone dies can be transferred to the deceased’s spouse or partner’s estate. This can mean that you will be eligible for savings that you weren’t before because of this change.
Also, bear in mind that the RNRB is in addition to the basic inheritance tax threshold- so you can put those two savings together, to save even more. The regular nil rate band stands at £325,000, even though the government stated way back in 2010 that they wanted to up it to £1 million; this means that for any assets inherited by a direct descendant, they are untaxed up to £325,000, and at a rate of 40% for anything that exceeds this amount. But because of the RNRB, the amount of untaxed inheritance you can receive is up to £425,000 and will be £500,000 by the 2020/21 tax year.
So, from this year, you can save 40% of the £100,000 exemption- or in other words, £40,000 worth of tax. By 2020/21, you can save up to 40% of £175,000, or £70,000. After that tax year, the rate at which the RNRB will increase will be determined by the Consumer Price Index, and so will follow the rate of inflation.
The complexities of the downsizing addition
But on top of these points, there is an additional one to consider: if you have sold your home, but sold it after July 8th, 2015 then you can still apply for what’s called the ‘downsizing addition’. Of course, your house would have had to qualify for the RNRB in the first place, but if it did then you can still apply whether you downsized or sold your interest in property completely. All that’s required is proof of the sale of the property, and that the deceased had indeed resided there at some point in time.
Essentially, what this means is that in select circumstances- you’re mostly going to qualify or not based on the dates of downsizing and eventual death- you can use the RNRB for inheritances other than property. The amount of the downsizing addition is difficult to calculate since house prices and therefore ‘property income’ can move up or down over time, both between the date of downsizing or sale and the date of death, and even the date of death and the calculation of the value of an estate. But the spirit of the law is that you can use the RNRB to pass on an equivalent amount of assets even if the property you could have passed on has been sold.
What should you do?
We would most certainly recommend that because of the complexities of the RNRB, and the added complexity of the downsizing addition, that you contact a tax accountant to help you figure out what you have to pay, and what you are entitled to avoid paying. Again, this is a very recent addition to inheritance tax law, and as such it’s not easy for individual taxpayers to predict exactly how much they will be left with after all is said and done. And the period after the loss of a loved one is stressful enough without having to calculate taxes!
As a firm with accountants in Birmingham and London, we deal with a high volume of cases for which the RNRB and the downsizing addition are relevant to their tax arrangements. Accountants for landlords are already getting to grips with these changes and what they will mean for their clients, so our advice is: stick with the experts.