The Inheritance Tax Residence Nil Rate Band in the countryside

The Conservative government introduced the new Residence Nil Rate Band (RNRB) to enhance the standard Nil Rate Band (NRB) of £325,000 for Inheritance Tax (IHT). The RNRB comes into force from 6th April 2017 and works in much the same way as the NRB – as a threshold below which IHT is charged at 0%. It can be claimed in addition to the NRB provided certain conditions are met (see below). The RNRB is being phased in over four tax years, starting at £100,000 in 2017/18 and rising to £175,000 in 2020/21. So from 2020/21 onwards individuals will have an IHT threshold of £500,000 (£325,000 NRB plus £175,000 RNRB) and married couples and civil partners will have a threshold of up to £1m. Unused RNRB is transferable to a surviving spouse, in a similar way to unused NRB.

Your estate will benefit from the RNRB, in addition to the main NRB, if:

  • you die on or after 6th April 2017
  • you leave your interest in the family home to direct descendants such as children or grandchildren (“qualifying beneficiaries”)
  • you leave an estate valued at less than an upper limit (initially £2m but set to rise with inflation from 2021 – the RNRB is tapered down for estates worth more than this).

The last point above is the one which impacts upon farming families. What might appear as a welcome break on the face of it, has to be looked at more closely as, due to this upper limit, the RNRB may not be much help to farming families.

When a farmer dies, the estate might be able to claim Agricultural Property Relief (APR) and Business Property Relief (BPR) and therefore reduce the value of the estate for IHT purposes. However, that in itself does not help because it is the value of the overall estate before reliefs which is relevant when considering the upper £2m limit. This means that farmers can no longer ignore the underlying value of farmland when IHT planning. There may, however, be a loophole for farmers – absolute lifetime gifts, even if they fall within 7 years of death, are not part of a person’s ‘estate’ for the purposes of the £2m limit. If farmers were willing and able to make a deathbed gift they could bring their estate beneath the taper threshold and save their heirs a significant amount of IHT. However, there would be disadvantages for Capital Gains Tax in making a lifetime gift, so careful and skilled advice would be required before making such a move.

Lindsey Sharples is a solicitor in the private client team at Barker Gotelee, Solicitors in Ipswich.

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Article originally appeared in County Life 10th Sep 2016