Technical Q&A examines passing on the residence nil rate band and the pension annual allowance
Q How does the residence nil rate band (RNRB) work when an individual, who is widowed, has sold their main residence and moved into a care home? Can the RNRB be claimed or will it be lost? In this case, all assets were passed to the surviving spouse on the first death and no gifts had ever been made.
AAs all were assets passed to the survivor on first death, then it should be possible to benefit from a transferable nil rate band (TNRB) and transferable residence nil rate band (TRNRB). The RNRB/TRNRB relief will be restricted in cases where the value of the estate of the deceased on first or second death exceeds £2m.
In order to benefit from the RNRB, an individual does not necessarily have to own a property at the time of their death. Individuals who downsize to a smaller and less valuable property, or dispose of their property (which appears to be the case here) and move into rented property or residential care, will, if certain conditions are satisfied, be compensated for any lost RNRB with a ‘downsizing addition’.
To qualify for the RNRB downsizing addition, broadly:
- The individual must have sold, given away or downsized to a less valuable home, on or after 8 July 2015, and lost out on all or part of the RNRB as a result.
- Assets of an equivalent value to the lost RNRB must be inherited by their direct descendants on death (with the relief being correspondingly reduced where the value of those assets is less than the lost RNRB).
Q My client had total taxable income of £110,000 in the last tax year and made a personal pension contribution of £10,000 in order to reduce her income to the £100,000 adjusted net income threshold and ensure she maintained the full personal allowance. However, she is also a member of a non-contributory defined benefit scheme and has just discovered her input for the tax year was £36,000. She has no carry-forward available. How much will her annual allowance charge be and will she lose some of her personal allowance due to the charge?
The annual allowance charge is a standalone charge. The charge is added to the client’s other income and taxed at the client’s marginal rate(s) of income tax. In this case, the total pension inputs for the tax year are £46,000, so the excess is £6,000. This is added to the client’s other taxable income of £100,000, so the full £6,000 will be taxed at 40% and the charge will be £2,400. The excess will not increase the client’s adjusted net income, so does not impact the client’s personal allowance. Therefore, in this example, the effective rate of tax relief on the contribution is 60%, ie 40% relief on the contribution plus restoring £5,000 of personal allowance, whereas the tax charge is 40% on the £6,000 over the annual allowance, giving an overall net benefit to the client.
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