Malcolm Finney outlines the requirements for transferability of the inheritance tax residence nil rate band.
Two major allowances for inheritance tax purposes (IHT) are the nil rate band (NRB) and the residence nil rate band (RNRB).
The NRB is a fixed amount (£325,000 for 2018/19). The RNRB is a maximum amount of £125,000 for 2018/19, rising to £150,000 and £175,000 for 2019/20 and 2020/21 respectively (although the RNRB may be less depending upon the circumstances of the individual). Although every individual is entitled to an NRB, this is not the case with respect to the RNRB.
Both the NRB and RNRB are transferable.
Residence nil rate band
The RNRB is effective for deaths on or after 6 April 2017. It applies where the deceased at death owned a residence (or has downsized) and which is inherited by the deceased’s children or other lineal descendants (e.g. grandchildren).
A childless individual or a childless couple are, therefore, disadvantaged (i.e. they can’t claim the RNRB). Similarly, a cohabitee is also disadvantaged where the child/children is/are the child/children of the other cohabitee.
Example 1: Married couple
Mr and Mrs Brown are married and each own 50% of their home with two children.
Mr Brown dies and leaves his 50% equally to the two children.
Mr Brown’s estate is entitled to an RNRB.
Example 2: Cohabitees
Bob and Mary are cohabitees and each own 50% of their home. Mary has a child from a former marriage.
Bob dies and leaves his 50% to Mary’s child. Bob’s estate isn’t entitled to an RNRB.
However, when Mary dies and leaves her 50% to her child her estate is entitled to an RNRB but is not entitled to the RNRB which Bob was unable to utilise.
An RNRB may be transferred either in whole or in part only between spouses and only on death. For a transfer to occur it is a requirement that the first spouse to die either is not entitled to an RNRB on death or is entitled but only utilises a part of it.
Example 3: Married couple and transferable RNRB
Mr and Mrs Brown are married with two children and each own 50% of their home.
Mr Brown dies and leaves his 50% to his surviving spouse. As the children haven’t inherited any part of Mr Brown’s interest in the home, Mr Brown’s estate is not entitled to an RNRB.
On Mrs Brown’s death, she leaves her 100% of the home equally to their two children. Her estate is entitled to an RNRB, but in addition her estate is also entitled to that part of her husband’s RNRB which he didn’t utilise; as he didn’t use 100% (i.e. any of it) of his RNRB, Mrs Brown’s estate is thus entitled to her own RNRB plus a further 100% of this amount.
So, if Mrs Brown died in the tax year 2019/20, her RNRB is £150,000 plus an additional 100% i.e. £300,000 in total, even if Mr Brown died in an earlier tax year when the RNRB was less.
Transferable RNRB is not an absolute amount
The quantum of any transfer of the RNRB is, as illustrated in Example 3, not an absolute amount but a percentage of the RNRB which is unutilised by the first spouse to die, albeit a percentage of the amount of the RNRB at the date of death of the surviving spouse.
Deaths pre-6 April 2017
Where the first spouse to die died pre-6 April 2017 (i.e. before the legislation was introduced), the surviving spouse on death is automatically entitled to an additional 100% of the latter’s RNRB by way of transfer.
RNRB may be capped
The amounts of RNRB mentioned above for a tax year are maxima. For example, if in 2019/20 an individual died and his home was worth (say) £120,000, the RNRB would be restricted to £120,000.
Need for a claim
The transfer of an unused RNRB is not automatic; it must be claimed (using Form IHT436) within the requisite two-year time limit.
Definition of ‘child’
Perhaps, unusually, a residence left to a stepchild enables the RNRB to be claimed. Thus, in Example 2, if Bob had prior to his death married Mary and left his 50% interest to her child, as the child has become a stepchild of Bob his estate would qualify for the RNRB.
Examine any wills to ensure that they allow maximum RNRBs to be claimed and, for cohabitees, beware of the possibility of losing at least one RNRB.
This article was first printed in Tax Insider in October 2018.