The current personal inheritance tax free allowance is £325,000.
In addition, each individual is potentially entitled to an extra inheritance tax free allowance, called the residence nil rate band (RNRB), of £175,000.
The RNRB is (just like the normal £325,000 inheritance tax allowance) transferrable between husband and wife so that on second death the combined RNRB allowance (£350,000) plus the combined £650,000 normal allowance, can be claimed by the estate of the last to die (so long as none of this allowance has been used up on first death). A total of £1,000,000.
However, making sure that the RNRB allowance can be secured on second death can be complicated. There are a number of factors to be borne in mind by anyone who is intending to rely on it.
- The value of the property must be £350,000 or more in order to obtain the full allowance. The amount of the RNRB available is directly related to the value of the property so if the property is worth only £250,000, then the value of the allowance is limited to this amount.
- If the overall value of the deceased’s estate is in excess of £2M, then the RNRB is reduced by £1 for every £2M the estate is worth over £2M.
- The property must have been the home of the deceased – a rental property does not qualify.
- The home (or the proceeds of it if it is sold prior to death) must be ‘closely inherited’, defined as meaning that it must be left in the Will to one of a child /grandchild or great-grandchild, on second death. Legally adopted, foster and step children also quality.
- If the home was sold prior to death (in order to fund care fees for example), the RNRB can still be claimed on the value of the proceeds of the sale so long as the sale took place after 8th July 2015 and the executors of the estate retain a record of the value of the sale.
- If the Will of the deceased specifies that the home is to be transferred into a discretionary trust then the RNRB is not available unless the trust assets are paid out to a beneficiary who is also a direct descendant within 2 years of death.
- The RNRB cannot be transferred between couples who are neither married nor in a civil partnership.
- The value of the combined RNRB is assessed as at the date of second death: this means that the full £350,000 would be available on a second death that occurred after 5 April 2020 even if the first death occurred back in 2010 before the RNRB was introduced.
If you would like to discuss whether you might qualify for the RNRB or if you would like to discuss inheritance tax planning more generally, please speak to your usual RG contact.