Inheritance Tax (IHT) is a tax that is charged on the value of estates of UK domiciled individuals. For non-domiciled individuals who are tax resident it is currently only charged on the value of UK situated assets, although the budget proposals of March 2024 announced a review of the tax treatment of non-domiciled assets for UK tax resident non-domiciles.
For many years IHT has been charged at 40%. A Nil Rate Band (NRB) has also been in place for decades. The IHT rate charged on the value of an estate below the NRB is 0%, so tax was only payable on the estate over that amount.
The NRB is currently £325,000 per individual estate.
From the beginning of the 2017-18 tax year an additional Residence Nil Rate Band (RNRB) was introduced which recognised that, because of the rise in property prices over the years, many estates were subject to IHT purely because of the value of a deceased’s home.
The RNRB is an additional allowance that reduces the amount of an estate subject to the 40% rate where the deceased’s main residence forms part or all of the estate that is passed on to “direct descendants”.
There are also special rules that may allow some or all of the RNRB to apply where the main residence was previously sold or downsized and the proceeds of the disposal are passed on as part of the estate on death.
How the RNRB is applied in the event that a property was sold or downsized before death is complicated and it would be advisable to seek professional advice if this is the case.
Tax Year RNRB
2017/18 - £100,000
2018/19 - £125,000
2019/20 - £150,000
2020/21 to 2027/28 - £175,000
The March 2024 budget proposals froze the level of RNRB until April 2028.
As each individual has a NRB and RNRB it’s possible for the estate of a married couple or civil partners to benefit from the combined allowances of £1million before the 40% tax rate applies to a deceased’s estate.
“Direct Descendants” are defined as children or grand-children, or their spouses or civil partners, of the deceased. It also includes step-children, adopted children and may include foster children and children under the deceased’s legal guardianship.
Siblings, nephews and nieces are not considered direct descendants.
To qualify for RNRB the property had to have been the deceased’s main home either at the point of death or at some point since July 2015. This includes a residential interest in a property where they didn’t own it outright. Married couples, or civil partners, each have their own RNRB and this can be passed on to the estate of the survivor on the first death so that two RNRB’s can be potentially used in the event of the second spouse or civil partners death.
The deceased does not have to be living in the property at the time of death, for example if it’s let and they move into a residential home.
The main residence does not have to be passed to the descendant as a property, it can be part of the residual estate (the remaining estate after payment of debts, fees and taxes) and sold by the executors to pay out beneficiaries.
If the individual had more than one property they considered their main residence the RNRB can only be set against one of the properties, not the combined value.
The residence doesn’t have to be in the UK but does have to be within the scope of IHT. This mainly affects non-domiciled individuals who are only taxed on UK situated assets. A UK domicile person’s estate is subject to IHT on their worldwide assets.
The value of the property for this purpose is the open market value at the time of death less any debts secured on it, such as a mortgage. If the deceased only owned a share of the property, the RNRB can only be used against the value of their share.
Where a married couple or civil partners jointly owned a property and the property passed to the survivor on the first death, the RNRB of the first person to die is available to be used against the qualifying property on the second death, irrespective of when the first death occurred. And the RNRB available to be transferred is that which applies at the time of the second death.
For example, a husband died in 2012 and his wife inherited his share of the property, either by bequest, or automatically.
The wife subsequently died in the 2023/24 tax year and, at that point the property was worth £500,000. If part or all of the property or residual estate is then passed to a direct descendant the RNRB of the husband for 2023/24 plus that of the wife will be available, so a total of £350,000.
If the main residence is worth less than the RNRB it is only the value of the property that can be used, unless the “downsizing addition” is available.
So if we use the example above, and the property at the time of the second death is worth £250,000, the RNRB available will be £250,000.
This allowance is to avoid the situation where an individual wants or needs to downsize but might be reluctant to lose some of the RNRB if the new property is worth less than the RNRB. It also applies if the main residence was sold and the individual does not own a main residence at death, for example, if they went into residential care or lived with a relative.
Even though the RNRB only came into effect in April 2017, if the individual sold or gifted a main residence on or after 8 th July 2015 the estate still qualifies for some downsizing addition.
The addition is fairly complicated to calculate and depends on a number of factors. It would be advisable to seek advice from a qualified professional if you are involved with an estate where it may apply.
The combined RNRB and downsizing addition will never be more than the value of the RNRB available at death.
Where an estate is worth more than £2 million there is a scaling back, known as “tapering” of RNRB at the rate of £1 for every £2 by which the estate exceeds £2 million. This means that where an estate of an individual exceeds £2.35 million the RNRB will be reduced to zero.
Where a property was gifted to a trust the RNRB may still apply but that will depend on what type of trust it is.
Neither the RNRB or downsizing addition is applied automatically to an estate, both must be applied for by the executors using an appropriate form available on the HMRC website.
IHT generally is a complicated tax system. With good quality advice from a qualified professional it may be possible to reduce the amount of IHT payable through financial planning. Contact us to discuss your circumstances if you are concerned about your family Inheritance Tax situation and we’d be happy to discuss potential strategies.
One of our qualified and regulated advisers would be very happy to discuss your requirements.
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