Inheritance Tax: Residence Nil Rate Band in the UK explained
The Residence Nil Rate Band (RNRB) is an inheritance tax allowance available on death when an estate includes a residence owned by the deceased and the residence is inherited by direct descendants, such as their children or grandchildren. We look at the implications of the RNRB relief in the UK.
To qualify the deceased must have died on or after 6th April 2017.
Since 2020-2021 the allowance has remained at £175,000. You cannot claim more than the value of the residence so you may not be eligible for the full allowance. If on the other hand, your residence is worth more than the £175,000 allowance you cannot claim the excess.
Inheritance tax is charged at 40% on the value of a person’s estate at the date of their death so the RNRB could save estates up to £70,000.
What is a residence?
A residence is any property that the deceased lived in as their home while it was included in their estate. The deceased must have lived in it at some point even if they did not live there at their death. It does not have to have been their main home and there is no minimum period of ownership. If they never owned it then the residence is not eligible for the relief.
Who are direct descendants?
The property must be ‘closely inherited’ by a lineal descendant which includes a child, grandchild or great grandchild or a great, great grandchild.
However, it also includes a step-child, an adopted child, a foster child and a child whom the deceased was appointed guardian or special guardian for. Nephews and nieces are not included.
Downsizing allowance
If you have sold your home and moved to a less valuable one or not purchased a new residence then you may be eligible to claim downsizing allowance. To qualify you must have downsized or ceased to own a residence on or after 8 July 2015, and the property that you have disposed of must meet all the usual RNRB requirements.
Transferable Residence Nil Rate Band
This is a transferable allowance between spouses and civil partners allowing you to carry over the unused percentage of your spouse or civil partner’s RNRB meaning that you could potentially have £350,000 on current figures to offset against inheritance tax. This would save estates £140,000. It doesn’t matter if your spouse or civil partner died before 6 April 2017 – even though the RNRB was not available at the time it can still be carried over if all the requirements are met.
Estates over £2 million
It must be noted that if your estate is over £2 million then the amount of RNRB that the estate is entitled to is reduced or tapered away by £1 for every £2 over £2 million. This means that there will be no RNRB relief for estates worth £2.35 million or more.
Furthermore, when calculating the estate for inheritance tax purposes this is not just what you own at your death but will include a number of other factors such as lifetime gifts, trust assets and under the new legislation to be brought into effect from 6 April 2027 pensions. The effect of this could be to bring your estates for inheritance tax over the £2 million threshold meaning you are not eligible for the RNRB.
Whilst not everyone can use this allowance, it can have a significant impact on reducing or eradicating the inheritance tax liability on an estate. If you own your own property (or did own) and have direct descendants, then the RNRB should be utilised and Wills drafted carefully to ensure all the requirements are met.
Contact our specialist Succession and Tax lawyers for advice on the inheritance tax allowances, the RNRB relief and future planning.
Share:
If you need advice on succession and tax issues
Speak to a member of our Private Client team
Arrange a callHOW CAN WE HELP?
To get in touch with one of our legal experts please fill in your details.
Enjoy That? You Might Like These:
articles
articles