Is the new Residential Nil Rate Band the lifeline farmers were expecting?

The short answer – possibly not. 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 new Residential Nil Rate Band (RNRB) comes into force on 6 April. In many ways, this tax relief will benefit farmers and landowners, however, there are a few important factors that will need to be considered. 

The RNRB is an additional Inheritance Tax (IHT) relief which could reduce the taxable value of a deceased’s main residence, allowing property of up to £1 million to pass to the next generation without HMRC receiving a penny. 

The RNRB allowance will be staggered over the next four years from £100,000 to £175,000. Unused allowances can be transferred between spouses as well as being added to existing allowances; however this will be frozen at £325,000. 

This means that effective from 6 April 2020, the combined allowance for a couple could amount to £1 million, made up of their combined personal allowances of £650,000 and RNRB of £350,000. 
Some farmers believe the farmhouse already attracts relief under APR (Agricultural Property Relief), however there is a significant proportion who believe otherwise – possibly because the land is let. For those that do, there is often a non-agricultural value, and HMRC are quite adamant about this, that remains taxable upon death. 

Is the new RNRB the lifeline that farmers were expecting? There is still significant debate about whether the new RNRB is a help or hindrance. For many farmers and landowners this new tax relief could be the difference between keeping their beloved family home or being forced to sell it. On this occasion, the devil is most certainly in the detail.

Qualifying residence
The deceased must have had a ‘residence’ when they die which the RNRB can be applied. This must have been the deceased’s principal home and not an investment property. Equally, provisions have been made for people planning on downsizing and moving into less valuable accommodation or elderly people moving into care homes. In this instance, the proceeds of the sale do attract the relief. 

Inheritance by direct descendant
The aim is to ‘protect’ or ‘help’ homes being passed from generation to generation. The qualifying residence must be inherited by a direct descendent, or spouse/civil partner of a lineal descendent (including step-children).  It also allows spouses and civil partners of lineal descendants, amongst a very few, to benefit. 

However, it is important to consider the case of the farmer who may not have direct descendants and who may wish to pass the house onto other family members.  In these instances, the new relief will not be of help. 

The potential “deal breaker”
The net value of the deceased’s estate must not exceed a tapering threshold over £2 million. RNRB will be reduced by £1 for every £2 that the estate’s value exceeds the £2million threshold. 

Despite lobbying, these provisions are particularly problematic for farmers in the sense that the legislation makes it quite clear, when calculating the net value of the estate, other reliefs or exemptions may not be taken into account. 

It is therefore not acceptable to take into consideration the potential APR relief or business property relief first and then apply RNRB to the balance of the residence. For many farmers and landowners RNRB will therefore not be claimable as high agricultural land prices may have pushed the overall estate value above the taper threshold. 

The RNRB can therefore be summarised as a useful relief that has the potential to save some inheritance tax, however the conditions should be considered as they prevent it from being universally applicable. Farmers should consider whether RNRB will apply for them or whether steps could be taken to help them qualify, however it is likely that alternative succession planning strategies will be needed. 

We hope that we have helped dispel some expectation or misunderstanding that the relief can be relied upon in every case. For non-farming readers, or those with a taxable estate below £2.2million (allowing for the taper), it may offer some scope to pass the family home to your children without the treasury benefitting, much…

It is never too late to start thinking ahead and if you would like expert advice on how the new RNRB, IHT and other allowance will impact upon your estate, please contact David Ward.