WHO WILL BENEFIT FROM THE RESIDENCE NIL RATE BAND?

WHO WILL BENEFIT FROM THE RESIDENCE NIL RATE BAND?

The residence nil rate band (RNRB) is set to be introduced in April 2017 and will be available for people who pass on their main residence to direct descendants such as children or grandchildren. This also includes step-children, adopted children and foster children.


The new band will be phased in this year at £100,000 and will rise to £125,000 in 2018, £150,000 in 2019 and £175,000 in 2020. If the allowance is unused, it can be transferred to your spouse or civil partner on death. However, if the net value of your estate on death is above £2 million, the RNRB will be tapered. There are some key points to consider when looking at the possible impact of the RNRB on inheritance tax (IHT) compared with the existing nil rate band.


The nil rate band has stayed at £325,000 since 2009 and is not likely to shift until 2021 – if it had been index-linked, it would have reached £385,000 (CPI based) or £408,000 (RPI based) in 2017/18.


Meanwhile, quarterly data from Nationwide show that average UK house prices rose by 37.6% from £149,709 in the first quarter of 2009 to £205,937 in the fourth quarter of 2016. However, estates that are subject to IHT will generally have higher valued property mostly in London and the South East.


Average London house prices rose by 94.9% in the same period, from £242,678 to £473,073. In the Outer Metropolitan Area, they climbed 70.4%, from £209,667 to £357,331. As well as house prices, equity markets have also strengthened since April 2009, with the FTSE All-Share Index rising by about 95%.


According to the Office for Budget Responsibility, the growth of IHT receipts will slow but not stop following the introduction of the RNRB, rising from £4.7bn in 2016/17 to £5.4bn by 2021/22.


Paula Steele, managing partner at John Lamb Financial Planning, says: “The RNRB will only benefit those who can meet its conditions. For clients looking to release locked-in capital from their property in a tax-efficient way, equity release is another option to consider.”