FEWER people are now liable for inheritance tax after the introduction of a new allowance when the wealth in a property is left to direct descendants. But the rules are complex – and some estates risk missing out of the benefit if wills and trust documents are not properly reviewed. As the Residential Nil Rate Band (RNRB) approaches its first anniversary, Jessica Savage, a solicitor specialising in Private Client Law, offers her insight here into the change and what you need to do.

THE INTRODUCTION OF THE RESIDENTIAL NIL RATE BAND (RNRB)

The standard Nil Rate Band (NRB) is currently set at £325,000 per individual meaning that a married couple have an allowance of £650,000 before any inheritance tax will be paid on their estate. This band has been frozen until the tax year 2020/21 but from April 2017 the RNRB was introduced meaning that, if a person dies after 6 April 2017 and their estate meets the qualifying criteria, individuals will have up to an additional £100,000 tax allowance.

To qualify for this allowance the deceased must have left their home, in full or part, to their direct descendants. For the purposes of this legislation, a direct descendant is:

• a child, grandchild or other lineal descendant
• a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

This also includes:

• a child who is, or has been at any time, their step-child
• their adopted child
• a child who has been fostered by the deceased at any time
• a child for whom the deceased was appointed as guardian or special guardian when the child is under 18

Whilst the allowance has been introduced at £100,000, it is set to increase each year until 2020/21 as follows:

This means that as of 2020/21 a married couple will potentially have a total tax free allowance of £1,000,000.

However, the allowances listed above are the maximum amounts available and these will be reduced if the property value is lower than the available relief. For example, if a person passed away in tax year 2018/19 leaving their half share in the property to their children and this share was worth 100,000 then the remaining £25,000 of the allowance would go unused and cannot be used against other assets in the estate.

However, as with the standard NRB, any unused RNRB can be transferred to a widow(er). The unused RNRB is transferred to the surviving spouse as a percentage meaning that in this example there would be an additional 20% of the current RNRB available on second death.

However, families with high value estates may not benefit from the additional tax allowance as for every £2.00 that the deceased’s estate exceeds £2m the RNRB is reduced by £1.00.

If the deceased owned more than one residential property at the date of death only one can qualify and the executors of the estate will have to decide against which property they wish to use the RNRB.

If placing property into a trust care needs to be taken not to lose the available RNRB. Whilst trusts that give the direct descendants an absolute interest in the house will allow for the application of the RNRB, property placed into discretionary trusts will result is a loss of the allowance.

As the elderly do not always remain in their own home until death, the legislation makes provision for situations where the family home has been sold. For example, if the deceased has moved into a care home and sold their home, the RNRB will still be available as long as the following criteria are met:

• Before the house was sold, it was owned by the deceased and would have qualified for RNRB.
• The sale proceeds, or any other property bought with them, remain in the estate of the deceased and are passed to their direct descendants.
• The property must have been sold after 8 July 2015 no matter the date of death.

Based on the introduction of the RNRB it is advisable to review your Will and any accompanying trust documents to ensure that your estate is not at risk of losing this allowance.

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