What is the Residential Nil Rate Band?

This article was last reviewed on 30th April 2021

The Residential Nil Rate Band (RNRB) was introduced in April 2017 with the aim of bringing down the inheritance tax bill for millions of normal British families whose parents’ or grandparents’ estates had bumped over the old £325,000 threshold.

The number of UK families being affected by inheritance tax (IHT) has been on the increase. The rise in property prices has pushed thousands of unsuspecting families over the old tax-free thresholds, making them liable to the hefty 40% IHT charges. The RNRB could save families up to £140,000.

Here’s what you need to know.

What is Inheritance Tax?

When anyone dies, the first £325,000 of their net estate is free from inheritance tax. This is the nil-rate band (NRB). Under the old rules, where the estate is over £325,000 on death (unless any tax reliefs apply), they were liable to pay IHT at 40%.

That could be a massive chunk that can’t be passed on to their loved ones.

Married couples and civil partners can transfer assets to each other without being liable to IHT. Any unused nil-rate allowance from the first spouse to die is transferred to the surviving partner. So, under the old rules, a widow may pass on an estate of up to £650,000 tax-free.

On an estate worth £1million, £650,000 could be passed on tax-free. The remaining £350,000 was taxed at 40%, incurring a bill of £140,000.

But that all changed with the Residential Nil Rate Band.

What is the Residential Nil Rate Band?

In days gone by, concerns over inheritance tax were the preserve of the super-wealthy. But increasing house prices meant more and more people’s estates were falling above the £325,000 nil-rate band.

In an attempt to make it easier to pass on the family home without paying tax, the government introduced a new Residential Nil Rate Band (RNRB).

The RNRB adds an additional £175,000 per person (in 2020/21) to the basic nil-rate band of £325,000 where there is a qualifying residential interest held in the estate (eg. a house which the person owned or had owned and had occupied as their home). So there will be no IHT on homes worth £600,000 (calculated based on the open market value, minus any liabilities secured on it, such as mortgages). In the Budget 2021 it was announced that the IHT thresholds will be maintained at this level up to and including 2025/26.

As with the basic nil-rate band, in the case of married couples and civil partners, any unused RNRB from the estate of the first to die can be transferred to the surviving partner and claimed on the second death.

That means a home worth £1 million could now be passed on tax free.

What else do I need to know?

As with all these things, it’s never quite that straightforward. Here are the main things you need to know.

  • The rules only apply to those leaving their entire estate to their children, grandchildren, step, adopted or fostered children. Any other relatives don’t count.
  • The rules do accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.
  • Only one residential property will qualify. If you have more than one property, you can select which qualifies, but you must be able to prove that the deceased lived there (buy-to-let properties don’t count).
  • Couples who are not married or civil partners cannot pass on any nil-rate bands.
  • The RNRB tapers as the estate value increases. The rate reduces by £1 for every £2 that the estate is valued over £2million.
  • Estates exceeding £2.7million lose the RNRB altogether.
  • If you want to downsize later in life, or need to move in to a care home, you won’t miss out on the benefit. You can still get the benefits of the tax-free threshold based on your previous home, as long as you ceased ownership after 8th July 2015, have evidence of the sale, and can prove that you lived there.
  • If the home passes into Trust, the RNRB may be lost – it depends on the Trust.

What do I need to do about it?

To make sure you don’t miss out on the additional residential nil-rate band, it’s important to make sure that your estate is shared in the most efficient way.

For example, say the RNRB has passed from one spouse to the surviving spouse – great! But if the combined estate is over £2million, both RNRBs could be lost due to tapering. It can get a bit complicated, but that’s where we can help.

For those who know their estates will be hit by inheritance tax, or be close to any of these nil-rate boundaries, it’s important to do a bit of estate planning. But don’t leave it to the last minute!

There are plenty of other measures that you can put in place, alongside the new RNRB benefits, to help reduce inheritance tax liabilities. A bit of expert advice will be very valuable.

And one more important step – make sure you review your will in relation to all of this, particularly if Trusts are involved.

If you’d like to discuss any of this, please get in touch!

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