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Residence Nil Rate Band – what is it and does it apply to you? IHT Planning tips

If someone dies and their estate is worth more than the basic Inheritance Tax threshold (currently £325,000), their estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due.

The RNRB is effectively an additional IHT nil rate band currently worth up to £175,000.

To qualify for the RNRB, your estate must include a property (or a share of it) that you have lived in as your main home at some stage of your life, and that you leave to your direct descendants, such as children, grandchildren, adopted children and stepchildren, as well as the spouses or civil partners of your descendants. Any other relatives, such as siblings, nephews and nieces, do not qualify for the RNRB.

If the deceased downsized or stopped owning a home after 7 July 2015 and assets of an equivalent value of the property – up to the value of the RNRB – are passed to direct descendants, the relief will still apply.

If the value of your residence is lower than the maximum RNRB, the maximum relief available will be restricted to the market value of the residence on death (or, if higher, the value of a home that you held on or after 7 July 2015).

For instance, if your residence is worth £150,000, the maximum RNRB available in your estate will be limited to the property’s value.

Any unused amount may be transferred to your spouse/civil partner on death. This is the transferable RNRB. Hence, in our example above, the unused RNRB of £25,000 is transferable to your spouse’s estate.

If none of the RNRB has been used in the spouse ‘s estate – usually because the whole estate devolved to the surviving spouse outright, hence exempt from IHT – the unused RNRB can be entirely transferred to the survivor. Therefore, the survivor’s estate would effectively benefit from £350,000 RNRB, being their own RNRB worth £175,000 and the transferable RNRB from their deceased’s spouse for a further £175,000.

Also, the home that you leave to your direct descendants does not have to be the same home that you lived in with your spouse or civil partner to either qualify for the residence nil rate band or to transfer it. Likewise, you do not have to have previously owned the home with your late spouse/civil partner or inherited it from them. It can be any home, as long as you lived in it at some stage before you died, and the home was owned by you at or after 7 July 2015 and is left to your direct descendants.

However, the RNRB will reduce if your estate exceeds £2 million on your death, even if all other conditions are met and the home is left to your descendants. It will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold. Therefore, the whole of the RNRB will be lost for an individual’s estate worth £2,350,000 or more. If the estate benefits from the transferable RNRB, the whole RNRB and transferable RNRB will be lost once the estate exceeds £2.7 million.

Hence, assuming a total estate worth £2.2 million including a former home worth £400,000, the RNRB would be tapered by £100,000, leaving RNRB available for the estate of £75,000.

The RNRB does not apply on gifts made during your lifetime. It only applies on your death. However, in calculating whether the £2 million limit is exceeded, gifts made within the previous seven years are not taken into account, i.e. an individual could have an estate valued at £2.7 million, give away £700,000, then die the next day and the £2 million limit will not have been exceeded, even though the IHT estate is still £2.7 million.

In effect, with careful estate planning, where a married couple (or civil partners) owned their main home and they leave it to their direct descendants, their combined estate would be exempt up to £1 million, as they would benefit from:

Their NRB £ 325,000
Their spouse’s transferable NRB £ 325,000
Their RNRB £ 175,000
Their spouse’s transferable RNRB £ 175,000
Total nil rate bands available £1,000,000

IHT planning tips

We are seeing a number of estates where the RNRB and transferable RNRB have been lost due to lack of careful estate planning.

  • If your estate is likely to include your current or former main home, you may consider a review of your Will to ensure that your main property – or any assets of an equivalent value if your home has been sold – or at least a share of it equivalent to the RNRB, passes to qualifying beneficiaries.
  • It is not unusual for a main home to be held on trust, whether a trust set up during your lifetime or on your death. The availability of the RNRB will depend on the type of trust, as only trusts under which the home is still regarded as forming part of your estate for IHT purposes will allow your estate to claim the RNRB. You may consider changing your Will and/or changing the type of trust holding your home to guarantee the availability of the RNRB on your death.
  • If your estate, combined with your spouse’s estate, is likely to exceed £2 million after the surviving spouse’s death, you may allow a share of the main home to pass on to your children or other direct descendants after the first spouse’s death to preserve the use of their RNRB.
  • You may also want to consider making some lifetime gifts of some of your assets to reduce your estate value taken into account to calculate the 2.35/2.7 million RNRB threshold. Such gifts would most likely have some wider tax consequences that would have to be ascertained before any action is undertaken.
  • If you are the executor of an estate, you may want to consider a deed of variation – or a deed of appointment – to allow a transfer of the Deceased’s main home, or at least a share of it, to qualifying beneficiaries or to an Interest-In-Possession Trust for the benefit of the deceased’s children.
  • If a discretionary trust is settled for the benefit of the surviving spouse, it will increase the chances of the estate on the second death, being within the £2m threshold.

Our team of tax advisers are here to assist and advise you on these tax-related issues. Please do contact us with any questions you have.

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