The residence nil rate band – not all it seems

The residence nil rate band

The residence nil rate band - not all seems

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 have at some point been the main residence of the deceased) made on death (not during lifetime) to your ‘direct descendants’ – defined as including your children or stepchildren as well as any adopted and foster children.
  • In 2017/18, the RNRB is £100,000, reaching £175,000 by 2020/21. Only then will there be a potential £1 million IHT total exemption for a couple.
  • 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, the RNRB is ‘inheritable’ by the estate of the surviving spouse/ civil partner. Unlike the NRB, it 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.
  • Highly complicated ‘downsizing’ rules apply.

The RNRB will result in some IHT-saving for many estates.

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 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.

 

 

 

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The information in this article does not constitute advice and should be used for informational purposes only. This content has been provided to Helm Godfrey by Taxbriefs.