The Main Residence Nil Rate Band (“MRNRB”) – hopes dashed!

In our previous Blog posts on this topic we expressed the hope that what we described as a complex and potentially unfair and divisive proposal would be abandoned and replaced by the simple and straightforward option of increasing the Nil Rate Band to £500,000. We hope the new Chancellor will see the light and opt for that straightforward solution.

Will you qualify for the MRNRB?
The MRNRB will be introduced on 6th April 2017, for deaths on or after that date. Lifetime transfers will not benefit from the MRNRB.

It will not immediately be £175,000, the figure previously quoted. It will start at £100,000 in 2017/18 and rise in stages to £175,000 by 2020/21. Only then will the “promised” total £1m NRB for couples be a reality.
A qualifying interest is defined as an interest in a house which has been lived in as the person’s residence when they owned it and which would have been part of their estate.

It will apply to a main residence only if it is inherited by the direct descendants of the deceased (including stepchildren, adopted children and fostered children) but NOT by other close family members. Perhaps surprisingly, the spouse or civil partner of a direct descendant who has predeceased the deceased is also included; there is an exclusion, however, where the surviving spouse or civil partner has in the meantime remarried or entered into a further civil partnership. So if Mr Alpha’s daughter Mrs Beta has predeceased him, and – somewhat unusually – Mr Alpha leaves the house to Mrs Beta’s widower, Mr Beta will qualify unless and until he remarries.
It will apply in some circumstances where a residence has not be passed to a descendant directly e.g. where it passes to a liferent Trust.

It will be a transferable amount between married couples and civil partners only, with the unused proportion of the Main Residence Nil Rate Band being passed to the surviving spouse or civil partner (Including if the first spouse or civil partner has already died or dies before 6th April 2017). There are complex calculations to be carried out to determine what is described as the “brought forward allowance” where the first death has already occurred or occurs before 6th April 2017.

It will apply to transfers of only one residence, and the allowable amount will be the net value of the main residence after any liabilities, such as an outstanding mortgage, have been deducted.
The value of the MRNRB will be indexed in line with Consumer Prices Index from 2021/2022.
The MRNRB (including the brought forward allowance) will be tapered away for estates with a net value over £2m, at the rate of £1 for every £2 over that limit.

These provisions still give rise to uncertainty. The use of “inherited” is interesting, and the definition is that the property is transferred as a result of the Will of the deceased, the rules of intestacy or some other means applying as a result of the death. It would be helpful for it to be confirmed that this would include a property passing as a result of a Deed of Variation of the Will or of a devolution on intestacy.

Downsizing
It is intended that the MRNRB will be available where a person has sold a main residence in order to downsize or to realise a capital sum, for example to pay of care home fees. The provisions are complex – it is possible that the MRNRB could apply even if the deceased owned no property at the time of death – and the MRNRB can be used against assets in the estate of an equivalent value to the home which was sold. The operation of this and the transferability of the NRB and MRNRB is perhaps best illustrated by this example, taken from the HMRC Guide (October 2015):-

A husband sells a home worth £300,000 in July 2020 and moves to a home worth £140,000. At the time the available MRNRB is £175,000. He has potentially lost the chance to use £35,000 (£175,000 less £140,000) which is 20% of the available MRNRB which could have applied had the more valuable home not been sold.
When he dies in December 2020, the home is worth £175,000 and is left to his son with the remainder of his estate passing to his wife. The estate can use the MRNRB £175,000 to the full and since the MRNRB was fully used on his death, there is no balance of the MRNRB to transfer to the widow. However, none the basic NRB has been used, so it can be transferred and will be available on the widow’s death along with her own MRNRB.

Conclusion
We remain of the view that the MRNRB is a thoroughly bad idea, and we continue to press for it to be abandoned in favour of an increased £325,000 Nil Rate Band (“NRB”). This has been fixed at £325,000 since 2009 and if it had been increased in accordance with the RPI it would now be £390,000. Our suggestion would be to increase the NRB to £425,000 with effect from 6th April 2017 and increase it over the following three years by £25,000 annually to £500,000 from 6th April 2020 with CPI increases annually thereafter.

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