The Residence Nil-Rate Band (RNRB) is an additional allowance for inheritance tax for deaths occurring after 6 April 2017.
When does the Residence Nil-Rate Band apply?
In order to qualify, you must own a property or a share in a property that you have lived in at some stage, and that you leave to your direct descendants (including children, grandchildren or step-children). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. In addition, it only applies on death and not on gifts or any other lifetime transfers.
How much is the Residence Nil-Rate Band?
The Residence Nil-Rate Band is set at £100,000 for 2017/18, and rises to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21. These figures are per person, so a couple may benefit from double the allowance.
How does it work?
The RNRB value is limited to the lower of the value of the property left to direct descendants or the total RNRB available. The RNRB is applied to the estate first and then the nil-rate band (currently £325,000) is applied.
If the value of the property is less than the RNRB, the balance cannot be offset against other assets in the estate. For example, if Mrs A dies and leaves her entire estate consisting of a property worth £350,000 and savings totalling £50,000, the total estate equals £400,000. From that, the RNRB of £100,000 can be deducted first, leaving £300,000, which is covered by the nil-rate band so there would be no inheritance tax to pay. However, if her assets were the other way round, i.e. a property worth £50,000 and savings worth £350,000, the situation would be different. In this case only £50,000 of the RNRB could be used, leaving £350,000 from which the nil-rate band can be deducted, with the remaining £25,000 subject to inheritance tax at 40%.
Can it be transferred?
Like the nil-rate band for inheritance tax, the RNRB can be transferred between spouses if it is not used in whole or part when the first spouse died, even if the first death occurred before 6 April 2017.
What happens if I downsize?
The RNRB is still available if you have downsized, given away or sold your home; this is known as the ‘downsizing addition’. For the downsizing addition to apply, you must have downsized to a less valuable home or ceased to own a home after 8 July 2015. Your former home would also need to have qualified for the RNRB if you had retained it and at least some of your estate must be left to your direct descendants. Calculating the downsizing addition is complicated, but it is generally the amount of the RNRB that has been lost because your former home is no longer in your estate.
Can I lose the Residence Nil-Rate Band?
The RNRB may be lost if you do not own a property at your death or if your direct descendants do not inherit on death. This means the RNRB can be lost if your property is left to some forms of trust, for example discretionary trusts or trusts for grandchildren where they cannot inherit until a specified age, for example 21. If the property is held in a trust prior to death, the RNRB will only apply if the death causes the property to pass to direct descendants, for example if a spouse has a right to live in the property during their lifetime (known as an interest in possession trust or life interest trust) and on their death it passes to their children without age restriction.
The RNRB can also be lost in whole or part if your estate exceeds £2 million. This is particularly important if you are a couple and individually your estates are less than £2 million but combined exceed this amount.
The RNRB will not be lost if a property is not specifically mentioned in a will, so long as it forms part of the estate on death. Nor will RNRB be lost if the property is sold during the estate administration by the executors.
Is there anything I should do?
It is worth speaking to a qualified advisor to review your will and any other arrangements you have made to see if any amendments should be made in light of this allowance.