The residence nil rate band and its impact on farmers

The Conservative Government’s 2010 manifesto said they would raise the inheritance tax threshold to £1m.  In 2015, a similar promise was made, with the words ‘effective inheritance tax threshold’.  But is this a reality?  Katie Gibson-Green investigates.

Rather than raising the threshold to £1m, the Government has introduced a Residence Nil Rate Band (RNRB) to run alongside the existing Nil Rate Band (NRB), which by April 2020, will have reached £175,000.  This means that an individual could potentially receive a total combined Residence and Nil Rate Band Allowance of £500,000.  Just like the NRB allowance, married couples can transfer their unused residence allowance to their surviving spouse on their death, making a total combined allowance of £1 million.

Whilst on the face of it, this sounds like what was promised in 2010, there are caveats to the use of the RNRB which need to be borne in mind. 

Certain conditions must be met to qualify for the RNRB.  Firstly, you must own an interest in a property in which you have lived.  This could cause issues, in particular for tenant farmers who may own a property that they wish to leave to a descendant, but in which they do not live.  They will need to prove that they lived in the property as their main residence at some point during ownership, as the RNRB cannot be claimed on properties that are purely investments.

“If your estate is worth over £2.35m the RNRB will not be available at all.”

Secondly the RNRB can only be used if assets are being left to direct descendants (children, grandchildren etc.).  This limitation can be unfair in a farming structure where other relatives, such as siblings, nieces or nephews may inherit the farm, either because the children are not involved in the business, or there are no direct descents.  If the farmhouse is passed to direct descendants to secure the RNRB, this may affect the ability to claim Agriculture Property Relief (APR) if those descendants are not involved in the day to day farming activities.

Thirdly, and most importantly for farming clients, if the estate is worth more than £2m, the RNRB starts to taper away by £1 for every £2 the net estate exceeds this threshold.  If your estate is worth over £2.35m, the RNRB will not be available at all.  What is more of a concern is that the net value of the estate is calculated before the deduction of APR or Business Property Relief (BPR).  For many farming families, the value of their estate means that they cannot claim the RNRB at all.

It is not all doom and gloom, however, as there are ways and means to use the RNRB, even if your estate exceeds £2m. Effective tax planning, or in extreme instances, deathbed gifts, can be effective ways to reduce the value of your estate to under £2m at the date of your death, therefore still qualifying for the RNRB.  Tax planning, gifting, APR and BPR are all complex areas, and professional advice should always be sought before action is taken.

For further advice please contact Caroline Dowding on 01206 217602 or email [email protected].