What does ‘Residence Nil Rate Band’ mean?
Wills, Trusts & Probate
The so-called Residence Nil Rate Band (RNRB) is a recent but potentially very valuable allowance for Inheritance Tax (IHT).
How much allowance is available?
The RNRB was introduced in April 2017 at the rate of £100,000 per individual (£200,000 for a married couple or civil partners). This will rise annually by £25,000 per individual (£50,000 for a couple) until 6 April 2020, when it will be worth £175,000 (£350,000 for a couple).
When added to the individual IHT threshold of £325,000 (or £650,000 for a couple), married couples/civil partners who have children, should not have to pay any IHT unless the value of their combined assets exceeds £1 million i.e. £650,000 + £350,000 = £1 million.
What could I be saving in IHT?
In 2020 when the RNRB threshold reaches £350,000 for a married couple, this represents a potential IHT saving of £140,000 – which is not to be sniffed at. However, there are a number of conditions attached to the RNRB. It is quite easy for the RNRB to be lost, by ineffective Will drafting or placing the home in a trust, only some of which qualify for the RNRB.
How does it work?
The conditions are as follows:
- The residence must be ‘closely inherited’ i.e. inherited by lineal descendants e.g. children or grandchildren. This includes step-children, adopted and foster children. Certain trusts for children will qualify for the RNRB, but a number do not.
- The property must have been occupied as the deceased’s residence for at least some time during his/her period of ownership. Note that the deceased need not still be residing at the property, at the date of their death. A property such as a buy-to-let which has never been lived in, will not qualify for the RNRB.
- If the house is worth less than the value of the RNRB, the allowance is limited to the market value of the house at the date of death.
- If the total value of the estate exceeds £2 million, the relief tapers off by £1 for every £2 by which it exceeds the £2 million limit.
So on the death of the survivor of a married/civil-partnered couple, no RNRB can be claimed if the value of the estate exceeds £2.5 million. However, there are certain techniques that can be used to reduce the value of the survivor’s estate for RNRB purposes.
- Particular care needs to be taken in the case of a widow or widower who remarries. In this case it may be possible to claim three lots of RNRB, but Wills require very precise drafting to achieve this.
- There are rules about down-sizing, and the selling and gifting of property, but these are extremely complex and specialist advice should be sought in order to try to preserve any entitlement to the RNRB.
Revisiting Your Will
Due to the significant potential IHT saving which can be achieved with proper drafting, we strongly urge all individuals to revisit their Wills. If they have not made a Will as yet, we suggest they now consider putting suitable Wills in place, in order to take advantage of this new IHT allowance.
Get in touch / Find out more
Please contact Elizabeth Maurice at email@example.com for initial advice as to whether or not you need to amend your Wills, to obtain the benefit of the RNRB.
Find out more about our Probate & Estates services here.