There has been a media buzz surrounding the new residence nil rate band (RNRB) – but what benefits will it have with regard to the inheritance tax position of a farmhouse?
What is the RNRB?
New legislation published over the summer will introduce a nil rate band offering inheritance tax relief on main residences passed to direct lineal descendants in addition to an individual’s current nil rate band of £325,000. The RNRB will apply to deaths on or after 6 April 2017 and will be £100,000 in 2017-18, rising in stages to £175,000 in 2020-21. For couples who qualify for the relief, an inheritance tax saving of £140,000 can be made but the rules are tricky and advice should be taken. Just as with an individual’s nil rate band, any unused amount of the RNRB is transferable to the deceased’s surviving spouse or civil partner. Similarly, it will be available to “downsizers” (subject to certain conditions) and to those who no longer own their own home.
Tax planning and the farmhouse: issues to consider
A farmhouse is treated in exactly the same way as any other main residence and qualifying married couples may have a combined nil rate band of £1,000,000. There are a number of issues to consider when building in the RNRB into your inheritance tax planning.
- Do you qualify for RNRB?
The biggest potential disappointment for farmers is that there will be a tapered withdrawal of the available RNRB for estates worth in excess of £2,000,000. The taper relief will be reduced by £1 for every £2 that the value of the net estate exceeds this threshold. For estates over £2.35 million, the RNRB is withdrawn altogether. The value of the net estate is calculated before Agricultural and Business Property Relief (“APR” and “BPR”)is applied and for many farmers, the size of their estate will prevent them from qualifying for the RNRB.
- Disturbance of Tax Planning
For many estates, securing APR and BPR on death against assets used in the farming business is paramount and careful tax planning strategies must not be disturbed in order to secure the RNRB. Securing APR on the farmhouse by ensuring it is used for the purposes of agriculture is crucial, and many retired farmers are advised to gift the farmhouse to the next generation farmer working in the business to ensure this condition is satisfied. If the working farmer is not the direct lineal descendant, and the farmhouse is passed to the descendant in order to secure RNRB, then this may thwart a claim for APR.
- Direct descendants
The RNRB is only available if a property is left to direct descendants of the deceased. This limitation will seem particularly unfair to farmers who intend to pass the family farm onto nephews and nieces and in doing so consider the farm to have been kept within the, albeit wider, family. Similarly, if property is left on discretionary trust, even if direct lineal descendants are in the class of beneficiaries, this does not qualify for RNRB.
The RNRB has introduced the £1 million inheritance tax free promised land. However, the pathway is fraught with conditions and restrictions.
There are some interesting opportunities to enter into lifetime giving, which are particularly appropriate for those estates which hover around the £2 million threshold. For example, if the husband has all of the assets in his name, he might consider giving a portion of his estate to his wife during his lifetime to bring his estate below the threshold. Similarly, lifetime giving (or even making deathbed gifts, in extremis) can be effected to reduce the value of an estate in order to qualify for relief.
Tax planning with the farmhouse must take into account the added complexity of tests for APR and BPR and advice should be taken before entering into any gift.