Charles Cooper considers the residence nil-rate band and transferable residence nil-rate band for inheritance tax. Charles practised as a Solicitor and Higher Court Advocate before being called to the Bar, and specialises in tax, trusts, wills and probate.
Inheritance Tax is payable on the value of a deceased’s estate above a set threshold, referred to as the Inheritance Tax Nil-Rate Band (‘NRB’). Since 09 October 2007 it has also been possible to claim the unused NRB of a spouse or civil partner who died before them, referred to as the Transferable Nil-Rate Band (‘TNRB’). From 06 April 2017 there has been an additional Residence NRB (‘RNRB’) and a Transferable Residence NRB (‘TRNRB’), the legislation for which is set out at ss.8D-8M Inheritance Tax Act 1984 (as inserted by s.9 Finance (No 2) Act 2015).
The RNRB and TRNRB legislation is relatively new and untested. ‘Residence’ refers to any interest in a dwelling house that was the deceased’s residence, at some point in time, and that interest must be ‘closely inherited’ (inherited by a lineal descendant) on or after 06 April 2017 for the legislation to apply. Where the first spouse or civil partner died before 06 April 2017 then 100% TRNRB should be available on the second death. These reliefs are subject to tapering provisions, and allowance has been made for individuals who ‘down-sized’ before death.
A specific gift of residence to a spouse or child under a Will is obviously ‘closely inherited’, but most Wills just leave residue to a spouse or child either absolutely or in trust.
If the residence forms part of residue, it is to be regarded as closely inherited for the purposes of RNRB to the extent that the residuary estate is closely inherited. For example, where residue (containing a residence) is to be divided one half to a child and one half to charity, only half of the residence would be treated as ‘closely inherited’.
If the residue is left in trust to a spouse or child for their benefit during their lifetime (a ‘life interest trust’) it should be regarded as closely inherited, but not if left on discretionary trusts.
With the legislation now enabling a potential combined Nil-Rate Band of £900,000 (on current figures) on death, it is worth checking whether the full Nil-Rate Bands may be claimed.