All you need to know about The Residence Nil Rate Band

The Residence Nil Rate Band (RNRB) is an allowance introduced in April 2017 to reduce the amount of inheritance tax an individual might pay when passing on their main residence. It is available in addition to the general Nil Rate Band (currently £325,000) if certain qualifying conditions are met.

The RNRB is the lower of the property value or £175,000. For example, a father dies in 2022/23 and he will gift his 50% share in the family home to his children. If this share is valued at £140,000, the extra £35,000 of RNRB will go unused (but may be transferred to his widow).

Both Nil Rate Bands are usually set to rise each year with inflation. However, in the budget following the Coronavirus outbreak, the thresholds were frozen at their current level until April 2026.

With both bands, families can potentially mitigate Inheritance Tax on up to £1m of their wealth.

Here’s an example:

Bob and Maria are married and have a collective estate of £1.2m , including a property valued at £400,000. Bob passes away first and leaves his whole estate to Maria. Because they are married, Maria inherits his assets without having to pay any inheritance tax and retains 100% of his NRB and RNRB.

When Maria dies, she leaves her estate to their children. She has use of her own NRB and RNRB, as well as Bob’s. After these allowances, on their Estate of £1.2m £200,000 would be subject to IHT at 40%, meaning only £80,000 tax due.

What does the RNRB mean for you and your family and what do you need to keep in mind for the future?

We have detailed some key facts to help you gain a better understanding.

Who can benefit?
The RNRB is only available where the main residence passes to direct descendants; essentially, children (including adopted, foster or stepchildren) and grandchildren.

Can it be transferred?
Known as the ‘Brought Forward’ allowance, the RNRB can be transferable between spouses and civil partners on death, much like the standard nil rate band. It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death. It does not apply to unmarried couples.

This is irrespective of when the first death occurred or whether they owned residential property at their death. There will always be an additional 100% RNRB unless the first spouse’s estate was greater than £2M.

The allowance does not apply automatically – it must be claimed. A claim typically needs to be made by the deceased’s representatives within 2 years ending from the end of the month in which death occurs.

Is it subject to any tapering?
People with large estates may not see any benefit from the residence nil rate band, as it will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M.

This means that there is no RNRB available if the deceased holds assets of more than £2.35M.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.

What if you were to downsize?
The RNRB will still be available where you have sold your home and downsized to a less valuable property, or even if you no longer own property, provided that you sold your home that would have otherwise qualified on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary.

Here’s an example:

Julia is a divorcee who has recently sold her home worth £350,000 and moved in with her new partner. She no longer owns a property. Julia passes away, having left her entire estate to her children from her first marriage.

Because Julia sold her property after 8th July 2015 and left her estate to her children, her executors can utilise the full £175,000 RNRB against her assets before then utilising her standard NRB.

What if you were to leave the family home in Trust?
The residence nil rate band may be lost where, for example, the property is placed into a discretionary will trust for the benefit of the children or grandchildren.

However, there are trusts more beneficial for children and grandchildren that will not result in a loss of the allowance. If the trust gives a child or grandchild an absolute interest or interest in possession of the home, the RNRB can still be claimed. Other trusts such as Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts will also retain the additional nil rate band.

What if you have more than one property?
Only one residential property can qualify. It is down to the personal representatives to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.

If you have more questions about the RNRB or what you can do to mitigate Inheritance Tax, please get in touch and we would be delighted to help you.