Exam Traps: Tax Stumbling Blocks - Residency & Residence nil-rate band

Taxation is one of the most complex and important topics that underpins much of financial planning – and it’s the topic that causes most consternation for students.

Tax is tested across multiple papers of the diploma and advanced diploma modules. It can seem complicated, but mostly it is about following a process or set of rules. Once you know the rules, you should be well on your way to exam success.Here we examine Residency and Residence nil-rate band, areas that typically causes confusion or trip up students.

Residency

This has a bearing on the tax position of an individual across all three of the main taxes – income tax, CGT and inheritance tax (IHT). There are two states of residency. A person is automatically resident if either:

• they spent 183 or more days in the UK in the tax year;
• their only home is in the UK – they must have owned, rented or lived in it for at least 91 days in total – and they spent at least 30 days there in the tax year;
• they work in the UK full-time.

A person is automatically non-resident if either:

• they spent fewer than 16 days in the UK in the tax year (or 46 days if they were not classed as a UK resident for the three previous tax years);
• they worked abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working.
• It is also necessary to understand the difference between residence and domicile, as they determine the tax position of an individual and whether they are subject to UK taxation. There are several types of domicile: domicile of origin, domicile of choice and deemed domicile.

Residence nil-rate band

The residence nil-rate band (RNRB) is an additional nil-rate band for IHT, currently £175,000, which is on top of the standard nil-rate band of £325,000. It is used to offset some of the value of a main residence but not buy-to-let or second properties, lifetime gifts or the remaining estate.RNRB can only be used if the property is left to a direct descendant – a child, stepchild, adopted or foster child – or a direct lineal descendant, such as a grandchild.The RNRB cannot be used when passing the main residence to a spouse or partner, as they are not classed as a direct descendant.Like the standard nil-rate band, the RNRB can be transferred to a spouse or civil partner, giving a total of £350,000 (£175,000 x 2) on second death subject to the direct-descendant rule.The RNRB can only be used to offset the net value of the property, after deducting any mortgage. If the property is worth £250,000 after deducting the mortgage, then only £250,000 of the RNRB can be used. The remaining £100,000 cannot be used against the rest of the estate.The RNRB is reduced or tapered for estates that have a net value of £2m or more. It is reduced by £1 for every £2 of value above the £2m threshold.

Like we said at the start, Tax is a subject tested across multiple papers of the diploma and advanced diploma modules. Need extra study support? Check out our range of CII courses: https://redmilladvance.com/courses/

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