The basic nil-rate band is still £325,000 but, provided a suitable claim is made before 30 September 2019, Paula’s personal representatives can claim not only Fred’s unused basic nil-rate band but also his unused RNRB.
The RNRB at the date of Paula’s death is £100,000, so her estate will have a basic nil-rate band of £325,000 x 2 plus an RNRB of £100,000 x 2 = £850,000. Consequently, the IHT liability will be (£1.5m – £850,000) x 40% = £260,000. Had Paula died on 1 September 2020, her estate could have had a basic nil-rate band of £325,000 x 2 plus an RNRB now of £175,000 x 2 = £1m. As a result, the IHT liability would have been (£1.5m – £1m) x 40% = £200,000.
But is it really true that the effective IHT threshold will be £1m in 2020/21? Clearly, some taxpayers will not have been married nor will they have been in a civil partnership, so their maximum IHT threshold will be £500,000. Similarly, a divorcee will have a maximum nil-rate band of £500,000 in 2020/21.
Even then, this will be the case only where they own or owned a main residence and it is or was worth £175,000 or more, after deducting any liabilities, such as a mortgage.
Additionally, the RNRB can be claimed only where the main residence passes on death to direct descendants (or ‘lineal descendants’ as defined in the Finance Bill), such as a child or grandchild. If a taxpayer has no direct descendants, the RNRB cannot be used at all.
The good news, however, is that downsizing will not result in the loss of some or all of the RNRB. Although the legislation to bring this into effect has not been included in the Finance Bill 2015, the explanatory notes accompanying the bill state that legislation will be included in the Finance Bill 2016.
This will have the effect of extending the benefit of the RNRB where, on or after 8 July 2015, a person downsizes to a less valuable residence or, indeed, ceases to own a residence at all. How this will work in detail, however, will not become clear until the publication of next year’s Finance Bill. Nevertheless, HM Treasury’s summer Budget report helpfully includes an example of how it might work.
Case study 2
Will, a divorcee, lives on his own in a house worth £300,000. He decides to sell this and buy a small flat for £120,000 in September 2015. If he dies on, say, 1 October 2020, when the flat is valued at £150,000, his estate will still be able to benefit from £175,000-worth of RNRB, provided he leaves the flat and £25,000 of other assets to direct descendants.
There is a further restriction that needs to be taken into account. There will be a tapered withdrawal of the RNRB where an estate has a net value of more than £2m. The RNRB will be reduced by £1 for every £2 that the net value of the estate exceeds £2m. This will mean that, even in 2020/21, there will be no RNRB for a single person with a net estate valued at £2.35m or more.
