Inheritance Tax and The Residential Nil Rate Band (RNRB)
Maximising What You Leave Behind
Most financial and legal experts will admit that the rules governing UK inheritance tax (IHT) are complex. Back in 2007, in an attempt to simplify the regime and “take the family home out of Inheritance Tax”, George Osborne promised to increase the nil rate band (NRB) from £325,000 to £1 million.
What was eventually introduced in 2017 was, in reality, a set of complex rules known as the Residential Nil Rate Band (RNRB). Designed to help those who want their direct descendants to benefit, the rules are set to change again next year.
But qualifying for the £1 million IHT-free allowances won’t be that straight-forward. Your eligibility will depend on a whole set of factors. For example, whether you are married and have children; who inherits the family home and what it’s worth, as well as the total value of your estate. Ultimately, it will also be affected by the date of your death.
So, it’s important to review your Will in light of the forthcoming changes.
What is the Residence Nil Rate Band (RNRB)?
Currently, inheritance tax (IHT) is charged on the value of your estate when you die. This includes your property and possessions, savings and investments, life policies and business interests. It can also include assets held abroad. If you own these assets jointly, the value of your share in these is included.
The IHT tax threshold for an individual is currently set at £325,000. This is known as the Nil Rate Band (NRB). The total value of assets above this level is taxed at 40% on death.
For married couples (or civil partners) any unused NRB can be transferred to the surviving spouse’s estate. So, effectively the threshold will increase to £650,000 on the second death.
Deaths occurring after 6 April 2017, it’s possible to claim additional inheritance tax threshold or RNRB.
Qualifying for RNRB
Broadly speaking, RNRB is available where:
- An individual dies on/after 6 April 2017;
- The estate includes a home or a share of it; and
- The home was inherited by a lineal descendant.
The definition of lineal descendants includes children, stepchildren, foster children, adopted children and their own lineal descendants. It does not include nieces and nephews.
Calculating Residence Nil Rate Band
The allowance depends on the date of death and is limited to the value of the deceased’s interest in a single property. The amount of the RNRB also increases in each tax year, as shown below:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21
After that, it increases in line with the Consumer Prices Index (CPI).
This means that for a death that occurred in the tax year 2017/18, the RNRB starts at £100,000. The amount will increase to a maximum of £175,000 for deaths that occur in the tax year 2020/21.
As property prices have continued to rise, IHT has hit more estates. Indeed, figures released by HMRC very recently, indicate a further increase in tax clawed back on the year before. So, when NRB and RNRB allowances are combined, it can be a valuable relief to claim.
Example – 2019
The maximum total tax-free allowance for an individual is £475,000. That’s £325,000, plus £150,000 RNRB allowance. For a couple, the maximum total tax-free allowance for them together is £950,000. That’s £650,000, plus £300,000 RNRB (additional residence allowances).
Example – 2020/21
Individual: NRB for an individual can be £500,000 (£325,000 + £175,000) by 2020/21. The RNRB can be transferred in a similar manner to the NRB, so the NRB can be £1 million on the second death.
Couple: This will increase to a total maximum tax-free allowance for a couple of £1 million, where the survivor dies after 6 April 2020.
Qualifying for RNRB Allowance
To qualify for the allowance:
- The home must have been lived in by the deceased;
- If the deceased owned more than one property, their executors can nominate one home to qualify for the RNRB, provided that the deceased lived in it at one point;
- A property that has not been lived in (e.g. a buy to let property) will not qualify. However, if the deceased occupied job-related accommodation, but intended to occupy another home owned by them, the RNRB could apply;
- Where individuals move to a less valuable home or cease to own a home, RNRB can still apply, provided that the ‘downsizing’ occurred on or after 8 July 2015 and some part of the estate is inherited by a lineal descendant;
- Lineal descendants must inherit directly (see above for definition of ‘lineal’);
- As with the NRB, the RNRB is transferable between spouses. Even if the first spouse died before 06 April 2017, the survivor can still benefit from the transferable allowance provided that the surviving spouse died after that date.
- Trusts are very useful for estate planning but in the context of RNRB, where a descendant does not inherit immediately (such as discretionary trusts) they are excluded from RNRB. Frequently used to discourage the young from inheriting large sums when they are ‘less mature’ but nonetheless, as things stand now, they may not necessarily be advantageous from a tax perspective;
- Gifts to lineal descendants that are subject to an age contingency (e.g. to children at the age of 25) will not benefit from the RNRB because the home will not be “inherited” by a lineal descendant;
- Complications can arise in assuming that the RNRB has been transferred to the surviving spouse or civil partner of the deceased. It’s not uncommon when in fact it may be the case that the deceased has already used some of their RNRB;
- As we get older many of us ‘downsize’ or sell property to move into residential care or a relative’s home. Whilst the RNRB can still be claimed, in certain circumstances, the tax allowance will not apply;
- The available RNRB tapers for higher value estates (+£2 million) at a rate of £1 for every £2 that the value of the estate is more than the Taper Threshold of £2 million (up to 5 April 2021).
This means that if a surviving spouse or civil partner dies with an estate valued at £2.5million, the threshold is exceeded by £500,000 and so £250,000 of any available RNRB is lost. If the first spouse died before 6 April 2017, the RNRB is deemed to be £100,000 so the unused RNRB is reduced to nil where the estate was valued at £2.2 million or more.
Always keep your Will up to date. Review your Will when there are any changes in your life and make sure it reflects your wishes.
RNRB may not be good news for everyone. IHT rules can be complex and there are often obscure anomalies that apply. Remember, if you don’t fully understand the implications for your estate contact us for more information or advice. We’re here to help.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.