The Residence Nil Rate Band – How it works, limitations and considerations
Current legislation permits the first £325,000 of every qualifying person’s estate to be gifted free from inheritance tax (IHT), this is called your ‘Nil Rate Band’ (NRB). Any value of your estate over this level on death may be subject to IHT at 40%.
Since the 6 April 2017 an additional Nil Rate Band now applies where a ‘residence’ is passed on death to a ‘direct descendent’, this is called the ‘Residence Nil Rate Band’ (RNRB).
Although this additional allowance could reduce the amount of inheritance tax due on your estate, there are various rules and limitations to consider when establishing how much of the allowance your estate may benefit from.
The maximum Residence Nil Rate Band allowance for each qualifying person is being phased in from the current tax year (2017/18) over four year, as follows:
|Tax Year||Maximum RNRB|
The maximum is then due to increase in line with the Consumer Price Index (CPI) from the 2021/22 tax year onwards.
As the RNRB is an additional allowance to the Nil Rate Band, if second death occurs after 6 April 2020 estates up to £1 million may pass IHT free.
Should the value of the residence be lower than the maximum RNRB the maximum relief available will be restricted to the market value of the residence on death. Any unused amount may be transferred to your spouse on death.
£2 Million Limit
The maximum allowance will be reduced for estates valued over £2 million. For every £2 of an estate over the £2 million threshold, the Residence Nil Rate Band will be reduced by £1.
This means that any individuals with estates over the value of £2.2 million in 2017/18, the Residence Nil Rate Band would be reduced to zero.
This can also reduce the amount that can be transferred between spouses, explained in more detail later in this article.
The RNRB only applies to one residence that has been lived in at some stage during your lifetime. If you own more than one residence you have lived in, your personal representatives can nominate which one should qualify for the RNRB. You do not need to live in the property at the date of death for your estate to qualify.
Any property that is owned but you have never lived in, such as a buy-to-let property, would not be eligible for the RNRB.
The residence must be left to a spouse or civil partner or direct descendants. These include the deceased’s children, grandchildren, remoter descendants, descendants spouses and civil partners, step children and adopted children. These do not include the deceased’s siblings, nephews and nieces.
As with the Nil Rate Band the Residence Nil Rate Band is transferable between spouses on first death, meaning that any unused allowance can be used by your surviving spouse on their death. This assumes that the first spouse to die qualified for the RNRB and is restricted to the limits explained previously in this article.
Where a person downsizes or ceases to own a home after 7 July 2015 and assets of an equivalent value of the property, up to the value of the Residence Nil Rate Band are passed to qualifying beneficiaries, the relief may still be available.
The Residence Nil Rate Band does not apply to any gifts made during your lifetime. Eligibility is based on the gross value of an estate on death before other reliefs, e.g business property relief, are applied.
In addition to the points explained in this article there are numerous other considerations including the terms of your existing Will and the trust provisions it may include. Some trust arrangements will deny access to the additional Residence Nil Rate Band and will have an impact on the amount of IHT payable by an estate.
Given that this is a complex area to consider, we would suggest seeking professional advice from our Financial Planning or Tax Departments to review your situation and discuss planning opportunities.
Please note that the information provided in this article is in no way intended as advice and is provided for information purposes only.