What is the Residence Nil-Rate Band?

Posted on By Louise Polcaro
inheritance,house,

The Residence Nil-Rate Band (RNRB) is an additional allowance for inheritance tax for deaths occurring after 6 April 2017.

When does the Residence Nil-Rate Band apply?

In order to qualify, you must own a property or a share in a property that you have lived in at some stage, and that you leave to your direct descendants (including children, grandchildren or step-children). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.

How much is the Residence Nil-Rate Band?

The Residence Nil-Rate Band is set at £175,000 for 2021/22. These figures are per person, so a couple may benefit from double the allowance.

How does it work?

The RNRB value is limited to the lower of the value of the property left to direct descendants or the total RNRB available. The RNRB is applied to the estate first and then the nil-rate band (currently £325,000) is applied. Both the Nil-Rate Band (NRB) and the RNRB will be frozen until 5 April 2026.

If the value of the property is less than the RNRB, the balance cannot be offset against other assets in the estate. For example, if Mrs A dies and leaves her entire estate consisting of a property worth £350,000 and savings totalling £50,000, the total estate equals £400,000. From that, the RNRB of £175,000 can be deducted first, leaving £225,000, which is covered by the nil-rate band so there would be no inheritance tax to pay. However, if her assets were the other way round, i.e. a property worth £50,000 and savings worth £350,000, the situation would be different. In this case only £50,000 of the RNRB could be used, leaving £350,000 from which the nil-rate band can be deducted, with the remaining £25,000 subject to inheritance tax at 40%.

Can it be transferred?

Like the nil-rate band for inheritance tax, the RNRB can be transferred between spouses if it is not used in whole or part when the first spouse died, even if the first death occurred before 6 April 2017.

What happens if I downsize?

The RNRB is still available if you have downsized, given away or sold your home; this is known as the ‘downsizing addition’. For the downsizing addition to apply, you must have downsized to a less valuable home or ceased to own a home after 8 July 2015. Your former home would also need to have qualified for the RNRB if you had retained it and at least some of your estate must be left to your direct descendants. Calculating the downsizing addition is complicated, but it is generally the amount of the RNRB that has been lost because your former home is no longer in your estate.

Can I lose the Residence Nil-Rate Band?

The RNRB may be lost if you do not own a property at your death or if your direct descendants do not inherit on death. This means the RNRB can be lost if your property is left to some forms of trust, for example discretionary trusts or trusts for grandchildren where they cannot inherit until a specified age, for example 21. If the property is held in a trust prior to death, the RNRB will only apply if the death causes the property to pass to direct descendants, for example if a spouse has a right to live in the property during their lifetime (known as an interest in possession trust or life interest trust) and on their death it passes to their children without age restriction.

The RNRB can also be lost in whole or part if your estate exceeds £2 million. This is particularly important if you are a couple and individually your estates are less than £2 million but combined exceed this amount.

The RNRB will not be lost if a property is not specifically mentioned in a will, so long as it forms part of the estate on death. Nor will RNRB be lost if the property is sold during the estate administration by the executors.

Is there anything I should do?

It is worth speaking to a qualified advisor to review your will and any other arrangements you have made to see if any amendments should be made in light of this allowance.

Stacy Keech TEP is a Solicitor – Wills, Trusts and Probate at Coffin Mew Solicitors in Portsmouth, UK

What is my residence?

Posted on By admin
residence

Your ‘residence’ is where you spend your time for tax purposes. It is not the same as nationality, citizenship or domicile.

It’s important to know your residence status if you generate income from abroad, as it will affect how much tax you need to pay for that tax year.

The UK tax year runs from 6 April to the following 5 April. If you are not a UK resident, you will only need to pay UK tax on your UK income and not on your foreign income.

If you are UK resident, you need to pay tax on all your income, whether from UK or abroad. There are, however, special rules if your permanent home – otherwise known as your ‘domicile’ – is abroad.

Your residence is determined by the Statutory Residence Test, which is made up of four parts:

1. How much time have you spent in the UK in a tax year?

You are automatically resident in the UK if, within the tax year:

  • you spent 183 or more days in the UK; or
  • you have a home in the UK that was available for at least one consecutive period of 91 days (with at least 30 of these days falling within the tax year). If you have an overseas home, you must have spent less than 30 days there during the tax year.
  • You don’t work on a ship or plane, and you do work full time with no significant breaks for 12 months. At least one working day must fall in the tax year and more than 75% of your work days in the year are UK working days).

You are automatically non-resident in the UK if, within the tax year:

  • you were in the UK for less than 16 days; or
  • you worked abroad full time (an average of 35 hours a week) with no significant breaks, and were in the UK for less than 91 days, with fewer than 30 of those days spent working.

Make sure you keep a record of trips back to the UK, and any days in the tax year where you spend more than three hours working in the UK.

What if I move during the year?

If you move in to, or out of, the UK, the tax year is usually split into a non-resident part and a resident part. This ‘split-year treatment’ means you only pay UK tax on foreign income based on the time you were living in the UK.

2. Leaving the UK (Automatic Overseas Test)

The Automatic Overseas Test will apply if you leave the UK part way through a tax year, either to:

  • Work overseas full time
  • Accompany a partner who has started work abroad full time
  • Live abroad and cease to have a home in the UK (if you had a UK home, you need to have given it up at the start of the year) and spend less than 15 days in the UK that tax year.

3. Arriving in the UK (Automatic Residence Test)

The Automatic Residence Test will apply if you:

  • Start to have your only home in the UK
  • Start full time work in the UK
  • Return to the UK after a period of work abroad
  • Accompany a partner who has returned to the UK following work abroad

4. Sufficient Ties Test

If you’re no longer UK resident, but don’t qualify under the Statutory Residence Test, the Sufficient Ties Test may help. This looks at how many days you have spent in the UK during the year, your permanent status re your work and home, the 90-day rule and your country of residence.

Leaving – and returning

If you have left the UK and returned in less than five years, you are treated as temporary non-resident, meaning any gains realised during that period are taxable in the year you return.

Need help?

As you can see, this can all get quite complicated. If you are in any doubt about your residence, seek advice from a qualified professional

Where is my domicile?

Posted on By admin
man looks at earth, searches for domicile

Domicile describes the country that you consider to be your home or where you have your permanent home. It is not the same as nationality, citizenship or residence.

You can only have one domicile at a time and the domicile that is allocated to you defines which system of law will be applicable to you in relation to things like marriage, divorce and succession.

The UK has three different types:

  1. Origin – where you are born, take father’s if married or mother’s if unmarried
  2. Dependency – children under 16 acquire their parents’ domicile (women would take husband’s when getting married prior to 1973)
  3. Choice – physical presence and an intention to stay ‘indefinitely’

Can I change my domicile?

Everyone acquires a domicile at birth. If you wish to change your domicile of origin or dependency then you need take a number of steps:

  • Purchasing property in new domicile, and abandoning property in old
  • Obtaining a new domicile passport and relinquishing the old one
  • Closing accounts and opening accounts in new domicile
  • Moving family and children’s education to new domicile
  • Drawing up a will and arranging to be buried in new domicile

It is very difficult to acquire a new domicile and the intention must be proven that not only do you intend to stay in the new domicile permanently, but to spend your final days there.

What does ‘deemed domiciled’ mean?

Once a person has been tax resident in the UK for at least 17 out of the preceding 20 tax years they will be ‘deemed domiciled’ in the UK. They will not have a choice about this and will not be able to change their domicile unless they can prove their physical presence and an intention to stay ‘indefinitely’ in another domicile outside of the UK.

Figuring it out

If you are uncertain of your domicile it would be prudent to speak to an expert, since a UK-domiciled person will be subject to UK inheritance tax on their worldwide assets.

*Although it is common to refer to UK domicile, for tax purposes a person is actually domiciled in England & Wales, Scotland or Northern Ireland.