The residence nil-rate band is an extra nil-rate band (NRB) for inheritance tax (IHT) purposes.
It is available in addition to the ‘standard’ NRB if the qualifying conditions are met. Namely if:
- the client dies on or after 6 April 2017;
- the client owns a home, or a share of one, so that it’s included in their estate; or
- direct descendants of the client such as children or grandchildren inherit the home or a share of it.
The RNRB will be:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21
For estates valued at more than £2m ($2.6m, €2.2m), the RNRB (and any transferred RNRB) will be gradually withdrawn or tapered away. With regard to the transfer rules, for married couples and civil partners any unused RNRB can be transferred when the surviving spouse or civil partner dies after 5 April 2017, regardless of when the first of the couple died.
In addition, an estate may also be entitled to the RNRB when an individual has downsized to a less valuable home, sold or given away their home after 7 July 2015.
Location, location, location
It might seem that overseas aspects to this new tax change are few and far between, and, on first glance, why would anyone think there is an international angle to consider?
The international dimension is contained in a comment from HM Revenue & Customs: “The home doesn’t have to be in the UK but it does have to be within the scope of IHT and it must be included in a person’s estate. This may depend on the deceased’s domicile and the location of the home.”
The driver for this statement is the fact that UK-domiciled individuals are subject to IHT on their worldwide assets so it doesn’t matter where the home is located. Non-UK-domiciled individuals are only subject to IHT on their assets in the UK, so the home must be located in the UK to be within the scope of IHT and within their estate. In these cases, the home will only qualify for the RNRB if it is in the UK.
The concept of domicile can be confusing for both clients and advisers. It is however a fundamental factor in determining a client’s liability to UK tax (particularly IHT) and has implications for other branches of the law.
An individual is domiciled in a particular legal system that might not be a country. In the UK, an individual is domiciled in Scotland, Northern Ireland or England and Wales. (Wales does not have a separate legal system but shares its legal system with England.) In the US an individual is domiciled in a specific state.
When an individual is born he/she acquires a domicile of origin. If a child’s parents were married at time of birth, domicile of origin is the same as the father’s. If a child’s parents were not married at time of birth, or if the mother was widowed before birth, the domicile of origin will follow that of the mother.
On turning 16, the individual can shed the domicile of origin and acquire a domicile of choice. Getting a domicile of choice involves satisfying a ‘two-pronged’ test. First, the individual must physically reside in the new jurisdiction; and second, the individual must form the intention to live permanently or indefinitely in the new jurisdiction having no real intention of living anywhere else. The first part of this test is easy to ‘prove’; the second incredibly difficult.
Consider a client with an overseas domicile of origin who has been UK resident for the past 10 years or so, perhaps having married a UK-domiciled individual. In that event, the overseas domicile of origin can be placed into abeyance by the acquisition of a domicile of choice in the UK, but it remains in the background ready to fill any gap that would otherwise arise. In this way, the client will never be without a domicile.
With that in mind, has the client acquired a domicile of choice in the UK? The client is resident in the UK, but is there an intention to reside in the UK indefinitely?
A wide range of evidence needs to be examined in evaluating intentions. No single act or circumstance is determinative. All facts, including apparently trivial ones, have to be considered.
An important aspect is whether or not there is a contingency upon the occurrence of which residence in the UK is anticipated to end. If the client has an intention to return ‘home’ on a clearly foreseen and reasonably anticipated contingency, there is no intention to remain in the UK indefinitely.
However, if the contingency is vague or sufficiently conditional, an intention to remain indefinitely in the UK could exist and a domicile of choice be acquired in the UK.
