The Residence Nil Rate Band

It’s important that your accountant is there to give you the best advice when you need it, in good times and in bad. When a loved one passes away it can bring a number of important decisions that will affect the surviving family. That is why it’s important to develop a relationship with your accountant – so they can understand what matters to you and your family, to help you make the right decisions when it matters.

 

The Residence Nil Rate Band (RNRB) was introduced in the 2017 budget. By 2020/21 it will be possible to pass on a residential property worth £1million to children or grandchildren free of inheritance tax.

 

The new RNRB is in addition to the current nil rate band of £325,000 and applies to a property that meets the following criteria:-

  1. It has been the deceased’s residence at some point. If the deceased has never lived in the property then it would not qualify;
  2. It is in the deceased’s estate at the date of death. If it has been gifted to the children prior to death then the RNRB is not available, even if the gift was within the seven years before death (please see our blog on “downsizing” which can assist in retrieving the RNRB if this has happened <Link>); and
  3. It is left to one or more direct descendants. A direct descendant is a child (including step-children, adopted children and foster children) of the deceased and their lineal descendants. It doesn’t apply to property passed to siblings, nieces, nephews etc.

 

The RNRB is being introduced over the next four years as follows:-

  • 2017/18 – £100,000
  • 2018/19 – £125,000
  • 2019/20 – £150,000
  • 2020/21 – £175,000 and then increased by the Consumer Price Index annually.

 

The RNRB is available to each individual and any unused amount can be passed on to a surviving spouse to use with his or her death estate.

The value of the RNRB is the lower of the net value of interest in the property (after liabilities such as a mortgage) or the maximum of the band.

 

A simple example may help to demonstrate how this works. Assume Mary is a widow who dies on 1 January 2021 and leaves her property worth £800,000 to her only child. Her husband’s estate was passed in full to Mary a few years before, and he had therefore not used any of his RNRB.

On her death the RNRB is a maximum of £175,000 and Mary would be entitled to her own RNRB plus 100% of her husband’s unused RNRB – a further £175,000. Mary’s estate would now have a RNRB of £350,000 to set against her property, leaving the remaining £450,000 chargeable to Inheritance Tax.

If Mary had no further estate, and her husband had not used any of his nil rate band at his death, she would have a nil rate band of £650,000 (2 x £325,000) to use against the remaining £450,000 and therefore no Inheritance Tax to pay

 

One drawback to the new RNRB is that it is tapered for estates with a net value of over £2 million at a rate of £1 for every £2 over this threshold, worth noting for for estates over £2.35 million in 2020/21. The value of the estate is measured before any reliefs such as Business Property Relief or Agricultural Property Relief.  Some estates that are very close to the £2 million threshold may find disproportionate advantages from bringing themselves within the band, even if the gifts made to reduce the estate do not ultimately qualify as exempt from Inheritance Tax.

 

One last point to remember is that it is limited to one residential property. If there are two properties in the estate, then an election must be made to detail which property the RNRB applies to.

 

This is a short summary of very detailed and complicated tax provisions. If you would like to discuss these issues with our experts further then please do not hesitate to contact us.