How will the new Residence Nil Rate Band (RNRB) affect you?
It’s never too late to start thinking ahead.
We should all start to come to terms with the legislation which comes into force from the 6th April 2017 in relation to the new Residence Nil Rate Band (RNRB) which was introduced by the conservative government to enhance the standard Nil Rate Band (NRB) of £325,000 for Inheritance tax. In many ways the rules are quite baffling and it will take some time to digest the implications as far as Succession and Tax planning is concerned. The RNRB is something that solicitors, accountants, farm advisors and individuals are going to need to understand However, the rules are quite baffling and careful consideration will need to be given to understand and realise the potential impact the RNRB will have upon Wills, Succession Planning and Lifetime Gifts.
The legislation sets out the requirements for a “qualifying residential interest” and when this is “closely inherited” on somebodies death then the executors will be able claim the RNRB in addition to the NRB. So what does this all mean? The RNRB is also going to be phased in as follows:-
Value of the Allowance
2017/2018 – £100,000
2019/2020 – £150,000
2020/2021 – £175,000
The standard NRB is now frozen at £325,000 until 2020/21. So by this date if you are able to satisfy the criteria there is the potential for an individual to have a £500,000 IHT allowance (£325,000+£175,000). For a couple of course this could mean a combined IHT allowance of £1 million.
The rules state that where an estate is over the threshold of two million pounds there is a tapered threshold which reduces the value of the RNRB by 50 pence for every £1 an estate exceeds that two million pound limit. This is important when it comes to tax planning and could have an impact upon farming families. On the face of it what might appear as welcome IHT tax break, has to be looked at more closely as the RNRB might not even apply or could be whittled down.
So when a farmer dies the estate might be able to claim Agricultural Property Relief (APR) and Business Property Relief (BPR) and thus reduce the estate for IHT purposes. However that in itself does not help as it is the value of the overall estate (before reliefs) which is taken into consideration when looking at the two million pound threshold for the RNRB. Each case will of course turn on the facts and when a farmer dies the terms of the Will, the size of the estate and who will inherit again will have an impact upon the application of the RNRB.
It is important to understand as well the definition of “closely inherited” which would normally include spouses, civil partners, children and lineal descendants. The treatment of “inherited” could be more problematical and certain trusts may not necessarily qualify such as discretionary trusts even if the beneficiaries are lineal decedents.
With the introduction of the RNRB this is inevitably going to bring back into focus overall IHT planning for farming families. Are there ways that the RNRB could be preserved? Could lifetime gifts help to bring estates below the two million pound threshold? These are all issues that would need to be explored.
Also what needs to come into the mix is the question of the Transferable Nil Rate Band (TRNB) which has now been around for a few years and most people will be familiar with. There is also however the possibility for the RNRB to be transferable in just the same way as the TRNB.
What happens when a farmer downsizes? What can happen if there are more than one property making up the farm? How can this effect the new RNRB?
There will be numerous permutations to work out how the NRB, TNRB, the new RNRB and eventually the new transferable RNRB could be utilised and preserved.
Let us look at a basic example which focuses on the two million pound threshold.
Denzil owns a farm in his sole name and dies May 2017. His wife died a few years before and used up her NRB. Denzil’s estate is made up as follows and was left to his son who works off the farm:
1. Farmhouse – £350,000
2. Farm cottag – £150,000
3. Farm Land – £1,800,000
4. Cash & Savings – £250,000
Total – £2,550,000
Denzil’s executors are able to successfully claim 100% APR for the farm land. The District Valuer and the Revenue challenged 100% APR over the farmhouse as Denzil was semi-retired from farming and all of the land let out. The Revenue unfortunately argued successfully that there was non-agricultural value over the farmhouse and reduced the claim for APR by 50%.
The farm bungalow was occupied by a non-agricultural worker under an assured shorthold tenancy. The District Valuer and the Revenue argued that the bungalow should not attract 100% APR.
As far as the IHT position was concerned Denzil has his NRB of £325,000. However because his overall estate amounted to £2,550,000 the executors were not able to claim the RNRB when he died in 2017. Denzil’s estate had to pay IHT as follows:
Assets outside APR/BPR
1. 50% Farmhouse value – £175,000
2 .Farm cottage – £150,000
3. Cash &Savings – £250,000
Less NRB – £325,000
Taxable estate – £250,000
IHT @ 40% amounts to £100,000
Should Denzil have made a gift of the farmland before he died to reduce his estate under £2 million? Should Denzil have made sure the cottage was occupied by a farm worker? Could Denzil have downsized and his son come back and actively farmed and live in the farmhouse?
If the above example makes you think about how your farm is structured and potentially how APR, BPR and other IHT allowances will impact upon your estate, perhaps this is the time to review matters. Deborah Adams, Director and Head of Private Client Team said” It’s never too late to be looking ahead and consider how your farm is structured and how IHT allowances will impact on your estate. Don’t delay contact Parnalls for advice and assistance AdamsD@www.parnalls.com or Pounderj@www.parnalls.com 01566 772375
KATHERINE FLASHMAN KITSON CELEBRATING 25 YEARS AS A DIRECTOR OF PARNALLS
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