Revisiting the Residence Nil Rate Band

The 6 April 2017 represented the dawn of the new financial year, with many previously announced measures now well in force. One of these changes is the government’s introduction to provide savers with an additional allowance called the Residence Nil Rate Band (RNRB).

We previously reported on this within our July – September 2016 issue in our article It’s a Mystery? The £1 million IHT exemption explained…*.

With the new tax year now well underway, we felt that it was timely to re-visit this important financial topic, as there may be many clients who are concerned about the potential impact of inheritance tax (IHT) on the value of their estates on death.

Estate planning is a crucial aspect of financial planning and one which many underestimate. As house price inflation continues at a pace across most regions and when combined with increasing investment returns on the back of bullish financial markets, many clients are inevitably drawn into the scope for IHT and wonder whether they are likely to pay and what may be done to mitigate this.

As we spend most of our lives saving and paying taxes, it will come to as no surprise that when the inevitable happens, we want to know that our loved ones will receive our hard-earned cash - and not the tax man.

This is why it is vital to be aware of any exemptions and allowances available to you, which can facilitate planning for the future. With the help of your Bellpenny Planner it is certainly worth familiarising yourself with the basics of the new RNRB.

Here’s a quick recap of the key points:

  1. The RNRB will be phased in over the coming years as follows*:

Tax year

£

2017/18

100,000

2018/19

125,000

2019/20

150,000

2020/21

175,000

2. The RNRB will be available in addition to the existing Nil Rate Band (NRB) of £325,000 but only in respect of property.* It’s important to note that these are maximum amounts which may be reduced if the property in question has a lower value than this.

3. The RNRB is only available to married couples or civil partners, when a residence is bequeathed to children or grandchildren.

4. Like the existing NRB, the new RNRB is potentially transferable between spouses and civil partners on death, irrespective of when the first death occurred.

5. Larger estates valued at over £2 million will see the RNRB tapered, reducing by £1 for every £2 in excess of this figure.

So, how might this look in practice? We have provided the following example to help illustrate this, however if you’d like to discuss your own personal circumstances, then your Bellpenny Financial Planner can provide you with support.

Let’s consider a married couple who have simple wills leaving their assets to each other, then upon their death it would be followed by their children. Upon the first death, when assets pass between one of the spouses, there will be no IHT to pay, regardless of the value of the estate, however the liability could potentially arise on the second death, when the children become the beneficiaries to the will as both parents are no longer alive. 

If the second death were to occur in 2020; when the total net estate is valued at say around £1.5 million, which includes a valuation of the residence in question of £400,000, then the IHT calculation could look a little something like this:

Net estate value:                                    £1,500,000

Less NRB (£325,000 x 2):                  - £    650,000

                                                              £   850,000

 

                                                                     £ 850,000

Less RNRB x 2 (£175,000 x 2):             -    £ 350,000

                                                                     £  500,000 which is subject to IHT @40% = £200,000

 

NB. The above calculation assumes full NRB’s are unused and available.

As you can see, there is a potential combined exemption of £1 million per couple, all of which may be free of IHT.

In the above simplified example, it is clear that even with increased exemptions, IHT may not be fully mitigated, however, with the help of your Bellpenny Financial Planner; other avenues could be explored depending on circumstances to further reduce or eradicate any future liability. Your Planner would welcome the opportunity to discuss the various options with you, feel free to contact us.

* If you’d like to request another copy of this newsletter, please contact us using to details provided and we’ll arrange for it to be sent to you.