Are You Missing Out on Inheritance Tax Residence Nil-Rate Band (RNRB)?

The Residence Nil Rate Band (RNRB) was first introduced in April 2017 following former Conservative chancellor George Osborne’s promise in 2015 to increase the inheritance tax-free allowance to £1 million. Designed to protect the family home from inheritance tax (IHT), it was fixed at £100,000 for deaths occurring in the tax year 2017/18 and has been phased in gradually over four tax years at a rate of £25,000 per annum until it reached £175,000 in the tax year 2020/21.

Whilst the government froze the RNRB allowance in last year’s Autumn Statement until 2028, the regulations are intricate. So, when it comes to inheritance tax planning, the complicated family dynamics in today’s world can mean couples miss out or fail to make the most of available tax allowances.

Inheritance Tax

The tax paid on a person’s estate after death is called Inheritance Tax (IHT). The current standard rate of IHT is 40%, with a tax-free threshold of £325,000 for all individuals. This is also known as the Nil Rate Band.

What is the Residence Nil-Rate Band or RNRB?

Since 6 April 2017, the Residence Nil Rate Band (RNRB) has been available as an additional inheritance tax relief if certain qualifying conditions are met.

To qualify, the deceased must leave a property (their principal ‘residence’, not properties that have never been your home) directly to a spouse or civil partner or lineal descendants. A lineal descendant is a member of an individual’s family line by blood or legal adoption. This includes children, grandchildren, adopted children, stepchildren and foster children.

Tapering

For estates valued above £2.35 million, there is no RNRB relief allowed. Where the estate’s value exceeds £2 million (and the family home is left to direct descendants), an RNRB taper is applied. Relief is reduced by £1 for every £2 that exceeds £2 million, which can result in RNRB dropping away entirely.

Downsizing

There are rules about downsizing. Broadly speaking, if an individual no longer owned a home after 7 July 2015 and assets of equivalent value to the property are passed to qualifying beneficiaries, RNRB could still be available. However, the rules that apply are complex, so it’s best to take specialist advice to preserve any RNRB entitlement.

Combined NRB & RNRB up to £1 Million Relief

From 6 April 2021, the maximum tax-free allowance for an individual is £500,000, comprising £325,000 NRB + £175,000 RNRB. For those who are married or in a civil partnership with children, the maximum total doubles to £1 million (two times £325,000 + two times £175,000).

EXAMPLE ONE: £900k Estate – No IHT Due

Married (or in Civil Partnership) with Children

Alan & Betty are married (both previously divorced). Alan has a son, Charles, and Betty has a daughter, Denise. The house they live in is owned by Alan, who gives Betty the right to live there when he dies. After Betty dies, the house is left to his son Charles.

Alan’s house is valued at £350,000. He also leaves £100,000 cash to Charles. The house is in a trust for Betty and will be left to Charles after Betty’s death. When Betty dies, she also owns a property worth £300,000, which has never been her home, and has savings of £250,000. She leaves her property to her daughter, Denise.

MARRIED – BETTY’S ESTATE IHT CALCULATION

	Estate Assets		IHT Allowances
Alan's Cash				£100k Left to son Charles
Alan's House	£350,000	RNRB for Alan	£175,000
		Transferable NRB from Alan	£225,000	£325k allowance Minus £100,000 left to Charles
Betty's House	£300,000	RNRB for Betty	£175,000	Transferable RNRB £175K as the property is passing to Betty's stepson Charles who is a 'lineal' descendant.
Betty's Cash	£250,000	NRB for Betty	£325,000
	£900,000		£900,000

As you can see from the calculation above, Betty’s estate is left free from Inheritance tax because:

The first £325,000 falls under the Nil Rate Band (NRB) and is tax-free.
Her estate also benefits from £225,000 from her husband Alan’s NRB allowance after leaving £100,000 to his son Charles.
Additionally, Betty’s estate qualifies for £175,000 RNRB and the same allowance from her husband’s property, which passed on her death to her stepson Charles. As he is a direct ‘lineal descendant’, this £175,000 qualifies as tax-free.

EXAMPLE TWO: £900k Estate – £230,000 IHT Due

Co-Habiting with Children

Alan and Betty cohabit and don’t want to marry again (both previously divorced). Alan has a son, Charles, and Betty, a daughter, Denise. Alan owns their house but sets up a trust, giving Betty the right to live there when he dies. After Betty dies, the house is left to his son Charles.

At his death, the house was valued at £350,000. He also has £100,000 cash, which he leaves to his son Charles. Betty then dies, leaving a property worth £300,000, which has never been her home, savings of £250,000 and the value of Alan’s house of £350,000 for IHT purposes, as she has a right to live there.

COHABITING – BETTYS ESTATE IHT CALCULATION

	Estate Assets		IHT Allowances
Alan's House	£350,000	RNRB for Alan	NIL	Not available as passing to Alan’s son on Betty’s death – not a direct ‘lineal descendant’ as weren’t married.
		Transferable NRB from Alan	NIL	Not available as did not marry Alan.
Betty's House	£300,000	RNRB for Betty	NIL	Potentially not available as was never her ‘principal private residence’.
Betty's Cash	£250,000	NRB for Betty	£325,000
	£900,000		£325,000	Tax paid at 40% on £575,000.00 = £230,000.00!

So, in the example outlined above, the burden of tax falls as follows:

TAX BREAKDOWN

TOTAL TAX PAYABLE	£230,000
TO BE PAID FROM ALAN’S ESTATE (IE ALAN’S HOUSE):
Divide £230,000 by the total chargeable estate of £900,000 = 0.255 Multiply this by the value of the trust property at £350,000 =	£89,444
TAX PAID FROM BETTY’S ESTATE
£230,000 – £89,444 =	£140,556

IMPORTANT TO NOTE

This calculation is wildly different to Example One, where Alan and Betty are married. Cohabiting with Alan means Betty’s beneficiaries miss out considerably. Married, no IHT is due. Not being married means Betty’s estate does not benefit from transferred NRB (from Alan) or RNRB allowances (the house is not going to a direct, lineal descendant). So, HMRC collects £230,000. It hardly seems fair!
In addition, there was IHT to pay when Alan died on everything over his Nil Rate Band: £450,000.00 less £325,000.00 @ 40% = £50,000.00.
Had Betty not had the interest in Alan’s house and lived in her other house, potentially, the tax would only have been 40% on £50,000 = £20,000.
Also, Alan’s beneficiaries will not be happy about paying the house tax!

Our Advice

The RNRB allowance can benefit individuals with children who own their homes. However, as highlighted above, depending on personal circumstances, the IHT charged on a person’s estate at death is complicated, and RNRB relief can be lost.

Make sure your Will is up to date by reviewing it regularly. Take professional estate planning advice if your estate value is near or over the thresholds mentioned here. You can invariably take steps to mitigate IHT, so it pays to speak to specialists.

Please contact us for more advice on the Residence Nil Rate Band or related queries. 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.