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Effective rural planning with the Residence Nil Rate Band

It is more than a year since the arrival of the Residence Nil Rate Band (RNRB), an important new relief for inheritance tax (IHT) which could save landowners up to £100,000.

But according to NFU Mutual’s analysis of a Freedom of Information request, only one in six estates which paid IHT last year claimed the new relief.

Individuals have an IHT allowance, the nil rate band, of £325,000. The RNRB adds £125,000 to this in the current tax year, rising to £175,000 in 2020/21, to give a married couple a total IHT exemption of up to £1m. The RNRB will then offer a potential IHT saving of £140,000 on top of the existing nil rate bands.

It is available only when a home which has been lived in by the deceased at some point is being passed to spouses, children grandchildren or other ‘direct descendants’.

Crucially RNRB starts to disappear once an estate passes the £2m mark. It tapers down at the rate of £1 lost for every £2 the value increases, so this year the maximum allowance of £250,000 (for a couple) would be lost once an estate has topped £2.5m.

Homeowners whose assets are mainly in a farm or business may assume that the £2m threshold will present no problems, as they would expect to benefit from agricultural or business property relief (APR or BPR).

Both these reliefs reduce the value of agricultural or business-related property for IHT purposes when it is gifted during lifetime or in the death estate.

But neither relief is taken into account when calculating the initial value of an estate for IHT purposes.

It makes the potential value of the RNRB all the greater, yet five estates paying IHT out of six, did not claim it between April and December 2017.

NFU Mutual suggests that while many of those estates may not have qualified, as not including homes being left to descendants, many more may have simply been above the £2m level or unaware of the new relief.

Can something be done where estates are around the £1m to £3m level and in danger of losing out?

Yes, in the form of effective Will planning by spouses, which can help preserve the valuable RNRB relief and save IHT.

Although unused RNRB can be transferred to a surviving spouse or civil partner, this will not help if the eventual estate becomes too valuable to utilise it. So planning will want to ensure that the survivor’s estate is below £2m.

In estates over £2m, assets can be given away in order to reduce the estate value, regardless of the potentially exempt transfer rule that the giver must live seven years. Financial planners can also help by advising, as part of an estate planning strategy, on the targeted use of assets in the most effective way, including re-thinking the use of any pensions.

Assets and property left in trust will qualify, as long as the only beneficiaries are direct descendants who will have at least a life interest. A property can be sold or given away before death, as long as assets of equivalent value at the date of the gift are being left to direct descendants, although special care is needed here.

So proper planning by Will can avoid leaving everything to the second estate, where it bunches up and takes the total over the limit.

Where the estates of both the first and the surviving spouse can be kept beneath £2m it may be possible to preserve both RNRBs and save up to £140,000 (in 2020-21) on the IHT bill.

Where farms owned by both spouses, we can draw Wills to put the interest of the first spouse into a discretionary trust on the first death, preserving APR/BPR and taking the asset out of the total that will be considered on the second death.

Such a trust can also be used when there is only one owner - the surviving spouse can be a trustee and have access to the assets and income if needed, without it being taxed on their death.

Published: 22 August 2018

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August 2018

Key Contact

Kirstie Williamson