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Inheritance Tax: The Residence Nil Rate Band

Posted on 5 April 2019

Inheritance Tax: The Residence Nil Rate Band

When someone dies they have available to them a Nil Rate Band (“NRB”) for inheritance tax (“IHT”) purposes. The NRB is the amount that a person can leave on their death to someone other than a spouse or charity without IHT being payable. The current NRB is £325,000.

In addition to the NRB, from 6th April 2017, the Residence Nil Rate Band (“RNRB”) was introduced and this is available if a person’s estate includes their home and it is left to their children or other direct descendants.

The RNRB was set initially at £100,000 but will increase by £25,000 each year until it reaches £175,000 in April 2020. After the tax year 2020/2021 these values will automatically increase each year by reference to the Consumer Prices Index unless the Treasury specifies an alternative value.

As with the NRB any unused RNRB can be transferred from a person’s estate to the estate of their surviving spouse or civil partner. If the whole RNRB was not utilised on the first death the second estate could qualify for a double RNRB in 2020/2021 of £350,000. However the amount of the RNRB starts to be withdrawn if the estate value is £2 million up until 5th April 2021 increasing yearly thereafter in the same way as the RNRB itself (as stated above). Where the value of the deceased’s net estate exceeds £2 million the RNRB will be reduced by £1 for every £2 above that limit.

There are, however, a number of factors that affect the availability and use of the RNRB:

  • It can only be used by those who hold a “qualifying residential interest” in the property at some time during their lifetime so basically the person must have owned or part-owned the property that was their residence at some point;
  • It cannot be offset against other properties owned by the deceased e.g. buy to let or investment properties, but if the deceased had two qualifying residential interests the Personal Representatives of the estate can nominate which property will utilise the RNRB but it cannot be divided against two properties;
  • If the deceased does not own their home at the time of death the RNRB may not necessarily be lost if, for example, the deceased downsized or sold a property to go into residential care on or after the 8th July 2015;
  • It is the net value of the home that is used for the calculation of the RNRB so any outstanding loans against the property e.g. equity release or mortgage, will be deducted from its value;
  • The property needs to pass to direct descendants i.e. close relatives which includes children, grandchildren or their issue together with their spouses or civil partners, including their widow(er) or surviving civil partner who has not remarried or entered into a new civil partnership. It also includes a step, adopted or fostered child or a child to which the deceased was appointed as a guardian;
  • With regard to trust arrangements, if the qualifying residential interest is in a Discretionary Trust it will not qualify for RNRB but if the Trustees appoint the property out to direct descendants within two years the RNRB could be claimed. The property in a Bare Trust or Interest in Possession Will Trust will qualify for RNRB if the beneficiaries are direct descendants.

Posted in: Trusts & Tax Planning