The new residence nil rate band (RNRB) is coming into force next week, research from Old Mutual Wealth* shows a staggering 70% still do not know anything about it. The basic principle of the RNRB is that a family home can be passed on to ‘direct’ descendants ‘free’ of inheritance tax. However, the rule is not that simple.
Rachael Griffin, financial planning expert at Old Mutual Wealth, comments:
“With the new residence nil rate band coming into force next week, it is alarming that 70% still have no understanding of the new allowance. Even those who claim to have a good understanding of the residence nil rate band failed to correctly answer some questions on the detail of the new legislation. The lack of understanding around the new rules could result in people not structuring their will or their financial affairs in the most effective way.”
Rachael explains the five things that even those who claimed to have a good understanding of the RNRB didn’t know.
1. 45% did not realise you can select which property to have the allowance against
“The rule can apply to any one home included in the estate as long as it was lived in by the deceased at some stage before the death. The home doesn’t even have to be in the UK. However, it does have to be within the scope of IHT and it must be included in a person’s estate.”
2. 45% did not realise the allowance will still apply even if the property is sold
“The government did not intend the RNRB to stop individuals from downsizing or selling their property. So they added a rule, which broadly speaking, means the value of the estate made from downsizing or disposal of the property is eligible for the allowance.”
3. 40% did not realise any outstanding mortgage is deducted before applying the allowance
“The value of the home for RNRB purposes is the open market value of the property minus any liabilities secured on it such as a mortgage.”
4. 36% did not realise property had to be left to direct descendants to benefit from the allowance
“To make use of the new allowance the recipient must be a child, grandchild or other lineal descendant or a spouse or civil partner of a lineal descendant. It’s important to note that direct descendants don’t include siblings, nieces and nephews or other relatives.”
5. 29% did not realise the allowance increases
“The RNRB will eventually allow up to £175,000 of property wealth, per person, to be passed on with no IHT liability. However, it is being phased in and in the ’17-18 tax year it will be £100,000.”
*Source: Old Mutual Wealth research conducted by Atomik Research. Survey took place March 2017. 1009 respondents living in the UK, aged 45 and over, with at least £50,000 in wealth.