The inheritance tax (IHT) residence nil rate band is now available,
potentially cutting the IHT bill on your estate by £40,000. This new relief could be valuable for many families, especially as the general nil rate band (NRB) has been frozen until at least April 2021.The residence nil rate band (RNRB) finally went live on 6 April 2017 and this is how it works:
The RNRB only applies to gifts of residential property (that at some point have been the main residence of the deceased) made on death (not during lifetime) to your ‘direct descendants’. This is defined as including your children or stepchildren as well as any adopted and foster children. The RNRB will not cut your estate’s IHT bill if you do not have any surviving direct descendants or if you wish to leave your home to someone who does not fall into this category, e.g. nieces, nephews or siblings. In 2017/18, the RNRB is £100,000, meaning that when added to the NRB, the total excluded from IHT for a couple amounts to a maximum of £850,000 or £425,000 per spouse/civil partner.
- The RNRB will increase by £25,000 in each of the next three tax years, so that it reaches £175,000 in 2020/21.
- Like the NRB, any RNRB unused on first death can be ‘inherited’ by the estate of the surviving spouse/civil partner. It does not matter if that first death occurred long before 6 April 2017, but the second death must be on or after that date.
- Unlike the NRB, the RNRB is not universal. Instead, it is subject to a tapering reduction of £1 for each £2 by which your estate at death exceeds £2 million. Larger estates will therefore see no benefit.
- To ensure this allowance is not lost there are some highly complicated rules where someone has downsized their home or moved into residential care.
Some IHT savings
The RNRB will result in some IHT-saving for many estates, although predictions say it will not stop the growth in IHT revenues for the government in the next few years. See our Inheritance Planning
For example, Mr A dies in 2021 when the full £175,000 RNRB is available. He leaves his children a house worth £300,000 and other assets worth £190,000. The £300,000 house is worth more than the £175,000 RNRB, so his estate qualifies for £175,000 RNRB plus NRB of £325,000 = £500,000. So the total estate is covered by the aggregate nil rate bands. Any excess would be taxed at 40%.
The arrival of the RNRB means that you should review your estate planning as soon as possible, contact us to see whether any changes are necessary. For example, you may need to revise your will. Given the complexities of the RNRB, expert advice is essential if you are to maximise the potential IHT savings.
The Financial Conduct Authority does not regulate tax advice. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate will writing and some forms of estate planning