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Prospering with the Residence Nil Rate Band

At the Conservative Party conference in 2007, the then shadow chancellor George Osborne promised that the next Conservative government would raise the inheritance tax threshold to £1 million.

When Chancellor Osborne finally enacted the reform it was not quite as simple as he had suggested.

Alongside an individual’s Nil Rate Band (NRB), below which no Inheritance Tax (IHT) is payable on an estate, there appeared a new allowance in the form of a Residence Nil Rate Band (RNRB) for which an individual’s estate is only eligible if they owned or had owned a main residence, and only to those where the direct family are inheritors of that property.

The government says the RNRB will release more people from paying IHT but in reality, IHT receipts hit a record £5.2billion last year, rising eight per cent on the previous year. HMRC told the Financial Times: “The allowance was only available from April 2017, much of the tax received dates from before the new relief took effect.”

It is, however, looking likely that the complications of the RNRB rules mean that many estates may not fully benefit. This could be due to lack of effective Will and estate planning during lifetime or lack of knowledge of how the rules operate and can be claimed following death.

Current and future tax years

In the current tax year the RNRB is £125,000, which when added to the NRB of £325,000, creates a total potential threshold for a couple of £900,000. As with the NRB, unused RNRB is transferrable between spouses and civil partners. 

By the tax year 2020-21 the maximum RNRB available will have increased to £175,000 and when added to the NRB of £325,000, (which remains frozen at the same level) this creates a £500,000 individual threshold or £1m for a couple.

Using the RNRB

The RNRB is not simply an additional allowance to claim against IHT. There is a list of criteria that needs to be met including whether or not you have a Qualifying Residential Interest (QRI) at death and whether you are passing that QRI to ‘lineal descendants’. Both conditions have lengthy and somewhat complex definitions.

A QRI applies to a home that the deceased has lived in, but it does not have to be the main ‘family home’ and if there is more than one property in the estate, a family can nominate one for the relief. QRI can also cover a property rented out for a long time and lived in for a short time, as long as there is proof of genuine residence at some point.

The property must be “closely inherited” by a direct or lineal descendant. That means children and their spouses (unless they have remarried) and includes stepchildren, adopted or foster children, and grandchildren. Grandchildren are entitled only if they inherit directly or via a qualifying Trust. Usual gifts to grandchildren within Wills to be held on them attaining a certain age, say at 18, 21 or 25, do not qualify and fall foul of the RNRB rules if the grandchild inherits before that age. Will provisions need to be reviewed. Siblings, nieces and nephews are excluded.

Finally if your estate meets the criteria to claim the relief, your total estate needs to be less than £2m to benefit in full.  The RNRB tapers away at the rate of £1 for every £2 over that £2m threshold and once your estate is over £2.25m or £2.5m if the double RNRB is available (in the current tax year), the RNRB disappears altogether.

Keep in mind

Although unused RNRB can be transferred to a surviving spouse or civil partner, this will not help if the eventual estate becomes too valuable to utilise it. So planning ahead will want to ensure that the survivor’s estate is below £2m.

Death bed planning is possible in estates over £2m, to give assets away in order to reduce the estate value for RNRB purposes, regardless of the potentially exempt transfer rule that the giver must live seven years for the gift to fall outside being chargeable to IHT.

RNRB can be a great opportunity to save a significant amount of Inheritance tax, but is a very complex area and it should not be assumed that everyone has knowledge of all the rules. By finding the appropriate advice, you can make the necessary adjustments in legal, tax and financial planning to ensure any tax reliefs to which you are legally entitled can be maximised.

Published: 23 May 2018

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May 2018

Key Contact

Gillian Coverley