The Residence nil rate band

The ‘Residence Nil Rate Band’ (RNRB) aims to remove more family homes from the inheritance tax (IHT) regime. The RNRB is now available for individuals who leave their main residence to direct descendants such as children or grandchildren (and this can include step-children).

Where available, the RNRB will serve as a top-up to the ordinary nil-rate band (NRB) allowance to which an individual’s estate is entitled on death (currently £325,000). Potentially, a married couple could have a combined IHT nil rate band of £1m from 2020.

What is it worth?

The value of the RNRB will be increased gradually over the four years from 6 April 2017.

  • £100,000 for deaths in the tax year 2017/18
  • £125,000 for deaths in the tax year 2018/19
  • £150,000 for deaths in the tax year 2019/20
  • £175,000 for deaths in the tax year 2020/21

Thereafter it will then increase in line with the consumer price index (CPI).

As such, if a surviving spouse dies on or after 6 April 2020, it may be possible for a married couple to claim two full RNRBs totalling £350,000. This, combined with the main NRB, increases the potential IHT threshold for spouses up to £1million.

However, owners of larger estates need to be aware that if an estate exceeds £2m on death, some or all of the RNRB will be lost. The amount lost is £1 of the relief for every £2 that the estate is over the £2m limit. We understand that this limit will be increased in line with the CPI from 6 April 2021.

How does it work?

Essentially the relief is available where a “qualifying residential interest” is left to “direct descendants”. As ever, the devil is in the detail and the new relief is extremely complicated; there are lots of conditions which must be satisfied if the RNRB is to be available.

The qualifying residential interest is limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there’s more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, won’t qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal (direct bloodline) descendants. Careful thought needs to be given as to the form of trust used to provide for direct descendants as certain trusts will note benefit from the RNRB.  In particular age contingent gifts (i.e. “for such of my grandchildren as shall survive me and attain the age of 25 years”) for grandchildren are likely to be problematic.

What if I downsize or sell my house to go into residential care?

The RNRB can still be available if a person downsizes or sells their property before their death, subject to compliance with the relevant requirements. This is a particularly complex area of the new relief and advice should be obtained. It is clearly now important to keep records of relevant property transactions.

What should I do?

The implementation of the new RNRB is a welcome, but very complex, tax relief for UK taxpayers. If you are to take advantage of the maximum RNRB available then careful planning will be required when preparing your Will or reviewing an existing one.  In particular, careful consideration needs to be given to

  1. The value of your estate(s);
  2. How residential property is owned between spouses;
  3. How residential property will devolve under your Will(s); and
  4. the form of any trusts used for the benefit of the next generation(s).

Similarly, executors and beneficiaries should examine the RNRB requirements carefully to ensure they are being applied correctly.

In some cases post-death tax planning may be possible, and advice should be obtained promptly to comply with the relevant time limits for such planning.

This article is written as a general guide. Any course of action must be based upon your individual circumstances as we strongly recommended that you obtain specific professional advice before you proceed. We do not accept any responsibility for action which may be taken as a result of having read this article.

If you or your clients would like to discuss this article please contact us.