Inheritance Tax - The residence nil rate band

Nil Rate Band

Each individual is entitled to an Inheritance Tax ‘Nil Rate Band’ (NRB) on their death of £325,000 (the NRB will be frozen at this level until April 2021, after which date it is expected to increase in line with the Consumer Prices Index). If the value of an individual’s estate on their death is less than that sum, no IHT is payable. If married couples or civil partners have their wills written so that all their assets on death are passed to the surviving spouse then on the death of the second spouse they can benefit from their widow/ widower’s NRB as well, meaning that the value of their estate would have to be more than £650,000 before any IHT is payable.

Residence Nil Rate Band (RNRB)

The RNRB gives an additional nil rate band on death but differs from the basic NRB in that it can only be applied to the value of residential property inherited by direct descendants on an individual’s death.

The RNRB will eventually be set at a level of £175,000 per individual but has been ‘phased in’ since April 2017 when it was first introduced at a level of £100,000 for deaths on or after 6 April 2017. The RNRB will increase again on 6 April 2019 to £150,000 and then to a level of £175,000 for deaths between 6 April 2020 and 5 April 2021. As with the NRB, the RNRB will then increase from 5 April 2021 in line with the Consumer Prices Index.

By way of a straightforward example, where a death occurs in the current tax year 2018/19, the combination of the NRB and the RNRB should enable an individual to claim relief of up to £425,000. By 2020/21 it will be £500,000.

Like the NRB, the RNRB can be transferred between spouses and civil partners if it is not used in whole or in part when the first spouse dies, even if the first death occurred before the introduction of the RNRB on 6 April 2017.

Conditions To Be Met

The RNRB is set against the value of a residence passing to qualifying beneficiaries. The residence does not necessarily have to be the property in which the individual lives when they die but it must have been occupied by them as their ‘residence’ at some point and included in their estate at death. If more than one property meets these criteria, the personal representatives of the deceased will be able to choose to which property the RNRB should be applied. The RNRB will not be available for buy-to-let properties or holiday homes etc. if the individual had never lived in these as his/her residence.

Qualifying beneficiaries are one or more direct descendants e.g. children (including step-children, adopted children or foster children), grandchildren etc.

It should also be noted that, for properties which exceed the value of the RNRB, any unused NRB will still be available to cover the excess.

Downsizing

The original family home doesn’t need to be owned at death to qualify for the RNRB. Downsizing provisions have been put in place recognising the fact that many people move to a smaller home or into residential care. 

Can the RNRB be Lost?

For estates valued at over £2m (after deducting any liabilities but before reliefs and exemptions), the RNRB will be gradually reduced by £1 for every £2 that the value of the estate exceeds £2m. Careful tax planning can help to mitigate the effect of this.

Existing ownership arrangements including joint tenancy and the use of discretionary trusts can potentially jeopardise the entitlement to the RNRB.

It may be possible, with careful planning, to avoid losing out on this potentially valuable relief. It makes sense to keep Wills under review to cater for changing circumstances. Tax planning exercises should also be carried out to ensure that based on current circumstances, reliefs are being preserved. Each individual’s circumstances are different and specific advice is essential. Please contact us if you would like to discuss anything further.