Wealth Management & Wealth PreservationMulti award winning chartered wealth management
The residence nil-rate band explained
The Residence Nil-Rate Band (RNRB) is an additional allowance for inheritance tax purposes on deaths occurring after 6 April 2017. The allowance was phased-in by the UK Government, starting at £100,000 in 2017 before gradually increasing to its current level of £175,000. It will remain available at this level up to and including the 2025/26 tax year.
| How the Residence Nil-Rate Band (RNRB) was phased in | RNRB allowance |
|---|---|
| 2017/18 | £100,000 |
| 2018/19 | £125,000 |
| 2019/20 | £150,000 |
| 2020/21 | £175,000 |
If applicable, RNRB could increase the inheritance you leave for your children by up to £70,000 (£175,000 @40%). However, there is a danger that some could miss out if they haven’t put in place the right plans to deal with their family home, or if they have an estate valued between £2m and/or above £2.7m. This is due to a tapering threshold, which we will cover further later in this article. But with the right planning, you and your estate could still benefit from the additional nil-rate band.
To clarify, the RNRB is in addition to the ‘nil-rate band’ (NRB) allowance of £325,000 which on death, every UK taxpayer receives on their estate. For example, and in simple terms, if the RNRB was not available and you were to die and your estate was valued at £600,000, inheritance tax (IHT) would be applicable on your estate after the NRB was deducted – leaving an IHT liability on the remaining £275,000. IHT would then be charged at the applicable rate, 40% for a basic rate taxpayer.
To benefit from the RNRB amount, the family home must be passed to direct descendants – that is, children or grandchildren and to be entitled to the full amount, you will need to keep the value of your individual estates below £2M. Beyond this, the allowance will be tapered and lost altogether once values pitch beyond £2.35M. There are estate planning strategies that may help you stay below the taper threshold, including lifetime gifting made at any time.
In the above example, if the RNRB allowance is applicable, the IHT liability on a £600,000 estate could be £100,000 or even zero (if RNRB is ‘brought forward’ – more on this later).
So, how does RNRB work?
The residence nil-rate band is in addition to the standard nil-rate band, which will remain frozen at £325,000 for the foreseeable. The additional amount available via RNRB is £175,000.
These are the maximum amounts. The available allowance will be reduced if the value of the property is less than this, or if the value of an individual’s estate exceeds £2M.
Just like the standard nil-rate band, the residence nil-rate band will also be transferable between spouses and civil partners on death. So, the allowance is not lost if the family home passes to the survivor on first death. This could mean if the second spouse died after April 2020, a couple could benefit from a combined nil-rate band of £1M (2 x £325,000 plus 2 x £175,000).
It also doesn’t matter when the first spouse died or even if they owned a property at all. The first spouse may have died many years before the introduction of the RNRB and the property held in the sole name of the survivor. Even so, there will still be an allowance which can be transferred or brought forward to the surviving spouse.
You could lose the Residence Nil-Rate Band
There are two main possibilities where the residence nil-rate band may be lost:
- Passing the family home to someone or something other than a direct descendant;
- The allowance is tapered if the estate is greater than £2M.
Estate Planning is therefore essential to ensure that an opportunity to claim the additional nil-rate band is not lost.
The £2m tapering threshold
When an estate is valued higher than £2m, the threshold is exceeded, and the RNRB is reduced by £1 for every £2 of value by which the estate exceeds the taper threshold. Tapering can therefore reduce the RNRB to zero for any estates valued at £2.35m and above.
RNRB can be ‘brought forward’, which in means essence a spouse can bring forward the RNRB allowance of a deceased spouse and use it to reduce the IHT applicable on their estate. This in turn leads to a potential increase of the additional allowance available through RNRB to £350,000, resulting in tapering not reducing the RNRB to zero until an estate is valued at £2.7m and above.
The value of the deceased’s estate is calculated by deducting liabilities (such as mortgages) but before deducting reliefs and exemptions such as Business Relief or Agricultural Property Relief.
For anyone with an estate where they are likely to exceed the tapering threshold, they may want to start planning their estate to retain the additional nil-rate band and increase the inheritance they can potential pass on to family.
Lifetime gifting can help reduce the net estate below the taper threshold. Schemes such as Discounted Gift Trusts or Loan Trusts can also help clients keep the value of their estates down while still giving access to a regular stream of payments from the trust or the repayment of the outstanding loan. This may ease any concerns for those who are not in a position to give up complete access.
It’s also possible to make gifts right up to the date of death to reduce the value of the estate for the purpose of tapering the residence nil-rate band. While chargeable transfers including failed Potentially Exempt Transfers (PETs) will be brought back into the estate to calculate the taxable estate, they’re not added to the value used for tapering.
It’s all too easy to miss out on the additional nil-rate band by not ensuring that an estate is distributed in the most tax efficient way. Quite often on death, everything is left to the surviving spouse either through the terms of the will or simply because assets are held as joint tenants. This could mean that the estate on the death of the receiving spouse is greater than £2M and the unused residence nil-rate band could be lost as a result of tapering. In some circumstances, making gifts on first death to the children and grandchildren may reduce the value of the survivor’s estate and preserve their own RNRB.
The ‘brought forward’ allowance
Unfortunately, this doesn’t apply to individuals who have not been married or have not entered into a civil partnership. This also doesn’t apply automatically and like most additional tax reliefs, it has to be claimed. A claim typically requires to be made by the deceased’s personal representatives within 2 years ending from the end of the month in which death occurs.
If there is any unused RNRB in the estate of the first spouse or civil partner of a couple to die, this unused part is available to increase the RNRB available to the survivor’s estate when they die.
Why might the RNRB have been 100% unused on first death?
- First to die might not have owned a home or a share of one
- The home was not ‘closely inherited’ upon first death
- First death occurred before 6 April 2017
The brought-forward allowance is calculated by reference to the unused percentage of the RNRB on the earlier death. It is possible to transfer unused RNRB from more than one pre-deceased spouse or civil partner by adding together the percentage of unused RNRB from each of them, but the total percentage is limited to 100%.
The brought forward allowance is available regardless of:
- When the earlier death took place,
- How much that earlier estate was worth, as long as the £2m taper threshold does not reduce the available allowance to nil, and
- Whether or not the estate included a home.
First death before 6 April 2017
As there was no RNRB at that time, none can have been used!
The brought-forward amount will be 100% of the RNRB in force at the second death. The only factor that might reduce the brought forward amount is if the first death estate value was greater than the £2m taper threshold.
The ‘downsizing addition’
These rules can be extremely complicated!
It had been recognised that people who had downsized to a property of less value in later life, or who had sold their family home when they moved into care, might lose some or all of their entitlement to the RNRB.
The downsizing provisions provide a way for any RNRB that might otherwise have been lost due to the disposal or downsizing to be reinstated, as long as other assets are ‘closely’ inherited. By closely we mean immediate family, children, grandchildren etc. This amount is called the downsizing addition.
All these conditions must apply:
- The person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
- The former family home would have qualified for the RNRB if they’d kept it until they died
- Their direct descendants inherit at least some of the estate
Tax rules refer to this as a ‘Qualifying Former Residential Interest’ or QFRI.
The cut-off date of 8 July 2015 means that any sale, gift or other disposal before that date cannot be taken into account.
The downsizing addition will only be available if the value of any home at the date of death is below the default or adjusted allowance and some assets other than the home have been closely inherited.
The downsizing addition cannot cause the RNRB to exceed the default or adjusted allowance. In the same way that there can only ever be one home in an estate, there can only be one downsizing event taken into account.
There is no automatic entitlement to a downsizing addition. The deceased’s legal personal representatives need to make a claim for the downsizing addition and they must nominate the disposal that they wish to be taken into account. The claim time limit is 2 years of the end of the month that the person dies. HMRC can extend this time limit in some circumstances.
Who you leave it to and how, matters
The RNRB is only available where the main residence passes to ‘lineal descendants’ on death, which for most people means their children (including adopted, foster or stepchildren) or grandchildren.
Therefore, it’s not, available for any lifetime planning with the family home. The property doesn’t necessarily have to pass directly to them to qualify, the RNRB will still be available if the property is left via certain types of trust. If the trust gives a child or grandchild an absolute interest or interest in possession in 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.
However, the residence nil-rate band will be lost where the property is placed into a discretionary will trust for the benefit of the children or grandchildren. Many wills contain discretionary trusts as means of controlling when and to whom benefits are paid. But even where the children or grandchildren are to benefit or end up benefiting, the additional nil-rate band will be lost.
It’s worth remembering that you don’t necessarily still have to own the property at your death to qualify. There are rules designed to help those who have downsized or may have sold their property and moved into residential care or with a relative since 8 July 2015. Any replacement property and/or assets must form part of the estate and pass to descendants to qualify. And once in the estate, the property does not literally have to be transferred to the children or grandchildren – the executors may choose to sell the property and pay out each beneficiary’s share of the house in cash.
To conclude
Talking about death and making provisions for the inevitable is never easy. In today’s world, with property prices being as high as they are, the chances of an estate exceeding the tapering threshold are greater than ever before. To benefit from the additional tax-free amount, it is prudent to assess how your estate is to be passed on and if possible, identify options to ensure your estate is able to claim the additional nil-rate band. This may mean you need to review your current Will to determine how your family home is passed on and whether you should start making lifetime gifts to protect your estate from an unwanted IHT liability. Either way, if you haven’t begun planning your estate to be passed on to your loved ones in the most tax efficient way, it’s never too early to start. The sooner you start making provisions, the more tax efficient options there are available to you.
