What is the residence nil rate band and how does it apply to me?

Purpose

The purpose of the residence nil rate band (RNRB) is to help people who wish to leave their home to their family by reducing the inheritance tax payable.

The nil rate band and residence nil rate band

The ‘normal’ inheritance tax nil rate band is currently £325,000. This means that no inheritance tax (IHT) is payable on a person’s estate up to this value. Since the 6th April 2017, the RNRB provides an additional inheritance tax exemption. The amount of RNRB available is currently £175,000.

Qualifying property

The RNRB ordinarily applies in respect of the deceased persons private residence but can be any residence which the deceased has resided in at some time during their period of ownership.

The ‘downsizing’ provisions allow the RNRB exemption to be claimed where a more valuable qualifying residence was sold after the 8 July 2015, or when the deceased no longer has a qualifying residence. In this instance, the RNRB may be claimed against other assets or cash to the extent that these are covered by the sale proceeds.

Closely inherited

To qualify for the RNRB exemption, the property must be passed to a direct descendant. Stepchildren, adopted children, foster children and grandchildren are all included, along with their spouses or civil partners.

Large estates

The RNRB has reduced availability for estates worth more than £2 million. It will taper away at the rate of £1 for every £2 that exceed the £2 million limit.

Transferred RNRB

When the first spouse dies, any unused proportion of their RNRB passes to the widowed spouse. When the widowed spouse dies, the first spouse’s unused RNRB can be claimed in addition to the widowed spouse’s own RNRB exemption.

Potential saving

With IHT charged at 40%, the RNRB can have a significant impact in reducing IHT.

Example (limited to the RNRB only)

Oliver dies in 2010 with an estate of £200,000, which he leaves to his wife, Freya. Oliver’s full RNRB is therefore available to transfer to Freya’s estate.

Freya dies in 2021 when the RNRB is £175,000. Her estate is worth £1.5 million. Because she has 100% of Oliver’s RNRB available, her RNRB will be £350,000.

The purpose of this blog is to make you aware of the residence nil rate band and provide a brief overview. It should be viewed as general guidance only. A more in-depth analysis of how it would apply to your estate would require legal advice. If you would like any advice on Inheritance Tax and leaving gifts in your Will, please do not hesitate to contact us on 01992 422128 and we will be happy to assist you.