Residence Nil Rate Band - The pitfalls

In April 2017, the Residence Nil Rate Band was introduced to provide an additional Inheritance Tax Relief for homeowners who wanted to leave their property to a direct descendant. Any unused portion of this Relief is transferrable between married couples. The Residence Nil Rate Band proved to be a welcome allowance for many whose properties alone took them over the standard Nil Rate Band allowance of £325,000 and would therefore have been liable to pay Inheritance Tax. The current Residence Nil Rate Band allowance is £175,000.

However, the Residence Nil Rate Band (RNRB) is not without its pitfalls.

Limited to value of main Residence

If your property is worth less than the £175,000 allowance, you cannot make use of the full amount. Since the allowance can only be used against your main residence, even if your main residence falls under the £175,000 RNRB, you cannot use any remaining allowance against your other assets.

Unmarried couples with children from previous relationships

The RNRB can still be claimed on a property which is being passed to step-children, but only if this relationship is formalised through marriage (or a civil partnership). Your estate cannot benefit from the RNRB if you pass your main residence to the children of your unmarried partner.

Right of Occupation to an unmarried partner

If you pass away and leave your partner with a lifetime interest in the property, this will also prevent your Estate from claiming the RNRB, as the property is not passing directly to Lineal Descendants. 

Estates over £2 million

The RNRB is decreased by £1 for every £2 that your Estate exceeds £2 million. This means that no RNRB is available on Estates over £2.35 million.

Leaving to remote descendants who have not attained legal majority

If you leave your main residence to grandchildren or remoter descendants, conditional upon them attaining a specified age and they have not attained that age at the date of your death, the interest will pass into a trust until they reach the age specified. The nature of the trust that the interest would pass into is not considered as passing directly to a lineal descendant for the purposes of the RNRB and your Estate cannot benefit from the allowance on any portion of the property that this applies to.

This only applies to remoter descendants – if you leave a property to children conditional on them attaining a certain age (of not more than 25 years) and they have not attained that age before you pass away, the interest would pass into either a Bereaved Minor trust or an 18-25 trust, which are considered acceptable under the RNRB provisions and does allow the Estate to benefit from the allowance.

Discretionary Trusts

When considering Estate planning, many people choose to put their share of a property or their wider Estate into trust to protect their assets, or to ensure that a beneficiary’s entitlement can be managed by trustees.

Although beneficial, one downfall is that passing your estate into a discretionary trust will mean that you lose out on the additional RNRB. As the nature of the trust is discretionary, the assets are not seen to pass directly to a lineal descendant. The allowance is therefore lost, even if the only potential beneficiaries under the trust are lineal descendants.

The allowance may be saved if the residential interest in a property is assigned to lineal descendants within 2 years of the date of death, however, this can be a complex area and seeking the advice of a professional is strongly recommended.

It is essential to seek the advice of a professional when drafting your Will to ensure that you make the most of the allowances available. You should seek specialist advice to avoid losing an allowance that you should be entitled to.

For more information, contact our Lifetime Planning team on 03333 208644 or email law@jcpsolicitors.co.uk