Inheritance tax residence nil rate band

Case studies merely prove the unacceptable complexity of this legislation

HMRC has published guidance on the residence nil rate band (RNRB) including 18 case studies.

The new relief starts for deaths on or after 6 April 2017 and applies where there is a home included in the estate that is inherited by a direct descendant and the total estate is £2m or less.

The home does not have to be the main residence, but it does have to be one that has been lived in at some point by the deceased. A direct descendant includes a child, step child, foster child, a minor child for whom the deceased was the guardian and any lineal descendants of the afore-mentioned. If the total estate value exceeds £2m, the relief is reduced by £1 for every £2 the estate exceeds £2m.

The relief starts at £100,000 from 6 April 2017 and increases in tranches of £25,000 to £175,000 by 6 April 2020. It will then increase in line with the consumer price index.

If the deceased downsized on or after 8 July 2015, either by moving to a cheaper home or selling up altogether, then provided the former home would have qualified for the RNRB if it was still held and at least some of the estate is inherited by a direct descendant, then the RNRB can be claimed. The provisions for calculating how much can be claimed (Finance Act 2016 sch 15) are extremely complex and require an understanding of algebra. We have expressed our concern about the complexity of the RNRB in general and the downsizing provisions in particular and that it is essential that detailed guidance is published.

The guidance and the case studies are far from comprehensive; one of the scenarios in the guidance note, that is where a surviving spouse having out lived two spouses can claim unused RNRB from both, but the total cannot exceed 100% of the maximum available RNRB, is not illustrated as a case study.

The final paragraph of the guidance is an understatement:

“The downsizing rules can be complicated where the RNRB is transferred or trusts are involved. Whilst this guide explains the basic rules, it can’t cover more complex situations. You should get professional advice about how to work out the RNRB in these situations.”

In the view of the Tax Faculty, is unacceptable to pass legislation that applies to a large proportion of the UK population, but which requires professional advice in order to understand and implement it.

  • I agree that this new legislation is bananas. I've heard these types of changes criticised as by products of ill conceived policies like the triple tax lock - you lock income tax, then introduce a dividend tax by stealth, restrict the personal allowance, restrict pension contribution levels, recover child benefit payments, and do other things to collect money in the back door whilst rendering the system longer and more complex in the process. This is just the same - why not just uplift the NRB to £0.5m and be done with it.

    If this new legislation is unacceptable to ICAEW, how forcefully has its introduction been resisted, and how publically is ICAEW willing to criticise the Treasury? Its notable that IFS are very vocal in criticising government tax policy. ICAEW often less so.

    I make this comment whilst sitting here thinking about the obligation, under threat of a £3k fine, to write to my clients in case I've given them offshore tax advice. That's a piece of law that should never have found its way on to the statute books, and again I wonder how forcefully ICAEW resisted it on behalf of their members.