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When £1m isn’t £1m and Other Misconceptions About the New ‘Residence Nil Rate Band’

Caroline Casagranda

Partner Caroline Casagranda, in our Probate, Tax and Trusts team, looks at common misconceptions surrounding the new ‘Residence Nil Rate Band’, first announced in 2015, and what value of assets individuals and couples can leave in their will without Inheritance Tax (IHT) being incurred.

It now seems a very long time ago that the Conservative party 2015 election manifesto stated that it would “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million”.

With the announcement of a new ‘Residence Nil Rate Band’ (RNRB) in the summer budget of 2015, it may have appeared that his intention had come to fruition. At present each individual has a Nil Rate Band of £325,000. With the ability to transfer unused nil rate band between married couples and civil partners, this comes to £650,000 per couple.  By the 2020/21 tax year, the RNRB will be £175,000 per person and will also be transferable between married and civil partners. Altogether, this brings a couple’s total IHT-free allowances up to the magic £1m, but all is not as it seems!  

The RNRB comes into effect from 6 April 2017.  It was introduced to appease those who had seen the value of their once modest homes increase to such an extent that they were now in the clutches of IHT and would not be able to pass their treasured homes on to their children.  The Government is expecting the legislation to cost approximately £980 million per year when the maximum relief is introduced in 2020/21, that is almost £2.5 billion of residential property value predicted to move outside of the IHT net!

The practical application of the RNRB is immensely complicated and there are many anomalies in the new legislation which will need clarification as time goes by. However, what the couple with assets exceeding £650,000 needs to know is:

  • The magic £1m cannot be achieved unless you are married or in a civil partnership
  • Your home (or your share in it) needs to be passed to ‘lineal descendants’ so if  neither you nor your spouse has children, no RNRB will be available
  • If your estate exceeds £2m, the RNRB will be reduced at a rate of £1 for every £2 above the limit

So, you’re married, you have combined assets in excess of £650,000 but under £2m and you have children; are you home and dry? The answer is, not necessarily. You will need a carefully drafted will.  There are so many pitfalls with the new rules that proper advice is absolutely essential.  Take the very simplest of wills as an example:

Mr and Mrs Smith have wills that provide for their estates to pass to the surviving spouse on first death and then to their only child, Jane. There is also a provision that if Jane predeceases, her share will pass to her own children, contingent on those children reaching the age of 21.

Mr Smith dies in 2017 and Mrs Smith follows in 2021. Unfortunately, Jane died in 2018 but she leaves behind her children Andrew and Katy who are 10 and 12 in 2021. Mrs Smith’s grandchildren inherit the estate, including the house, so surely the RNRB is available?  The answer is no!  The problem is the contingency age. The simplest way around this is to remove the contingency age altogether so that the property passes straight to the children outright. This means that their shares of the property (or the proceeds of sale from it) will be looked after for them until they are 18 and legally entitled to them.  For grandparents who want more protection than that, more complex wills are needed to circumvent the problem.

The above example demonstrates that there can be significant problems with even the simplest of wills. Where people have more complex requirements, for example because there has been a second marriage or because they want more flexible arrangements or to divide their estates between lineal descendants and other beneficiaries, then specialist advice is more important than ever.  

There is a popular misconception that wills are just basic documents that should be cheap and easy to produce.  You may end up with a very simple will, however, the advice given to you by the person instructed to draft your will is invaluable.  Saving money in the short run may cost your estate (and your family) greatly after your death.  The new RNRB rules contain many traps into which the unwitting may fall. The best way to guard against this is to get the right advice.  

It may come as a surprise to some, but will writing is not regulated work.  Anyone can set up a company and create a website professing to be a ‘specialist’ will writer or ‘estate planner’. He will not be required to take out indemnity insurance, so if it all goes wrong and your estate misses out on £350,000 worth of RNRB as a result, there will be little point in suing him.  Solicitors are required to have professional indemnity insurance and must abide by a strict code of professional conduct. However, not all solicitors are best placed to give you the advice you need.  In smaller firms, it is not uncommon for solicitors to cover more than one area of practice; you may end up being advised on your will by someone who is actually more competent at property law or family law.

At Blandy & Blandy LLP, we believe that no one should advise on the drafting of a will without also being able to advise on IHT.  Where the tax implications are particularly complex, we have highly qualified specialists who can assist. Our expertise in all aspects of private client law – wills, probate, tax, trusts and mental capacity – is acknowledged in the major legal directories, Chambers UK Guide and The Legal 500. We believe in getting it right now, and providing you with the reassurance that when you die your wishes will be achieved.  

For further information on wills, estate planning and tax, please contact Caroline Casagranda or a member of our Probate, Tax and Trusts team.

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.