Inheritance tax (IHT) has proved to be notoriously unpopular, leaving many grieving families with a hefty tax bill.
The aim of the residence nil-rate band (RNRB) is to relieve this burden by making it easier for individuals to pass on the family home without incurring inheritance tax.
Who does the RNRB affect?
The residence nil-rate band applies to individuals with direct descendants who have an estate (including a main residence) that exceeds the inheritance tax (IHT) threshold (or nil-rate band) of £325,000 for 2019/20.
How does it work?
If you’re giving away your home to your children or grandchildren (including adopted, foster and step-children), you may qualify for the residence nil-rate band, meaning you’ll gain an additional threshold before IHT becomes due on your estate. This is a further;
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21
It will then increase in line with the Consumer Price Index (CPI) from 2021/22 onwards.
The amount is added onto the standard nil-rate band; for instance, in 2019/20, your inheritance tax threshold is £475,000 (325,000 + £150,000), but it will only apply up to the value of your property.
What happens if I have downsized or moved into care?
The family home doesn’t need to be owned at death in order to qualify for the RNRB. This is useful if you have downsized or sold your property to move into residential care or a relative’s home.
The RNRB will still be available provided:
- the property would have qualified for the additional threshold had the individual retained it
- the replacement property and/or assets form part of the estate and pass to descendants
Special rules deal with downsizing or selling up completely. If this applies to you, it’s recommended that you seek professional advice.
What does ‘tapering’ mean?
The residence nil-rate band will be subject to a tapered withdrawal of 50% if your estate is worth more than £2 million. In other words, you will lose £1 of the additional threshold for every £2 of your estate that exceeds £2 million.
The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021/22 onwards.
Is the RNRB transferable? What happens if my partner died before April 2017?
Like the standard nil-rate band, any unused portion of the RNRB is transferable between spouses and civil partners. It’s the unused percentage of the RNRB from the estate on the first death which can be claimed on the second death.
If your partner died before 6 April 2017, their estate would have used none of the RNRB because it wasn’t available. The full RNRB will, therefore, be available for transfer unless the value of their estate exceeded £2 million and the RNRB has tapered away.
Download your FREE guide to find out how to take advantage of the residence nil-rate band.
What if I own more than one property?
The residence nil-rate band is limited to one residential property. It will be down to the personal representatives to nominate which property should qualify if there’s more than one in the estate. Bear in mind that a property which was never a residence of the deceased, such as buy-to-lets, can’t be nominated.
What if the family home passes into trust?
You could risk losing the RNRB if, for example, the property is placed into a discretionary trust for the benefit of children or grandchildren. However, some trusts for the benefit of children or grandchildren will not result in a loss of the allowance.
The RNRB can still be claimed if the trust gives a child or grandchild an absolute interest or interest in possession in the home. Further rules exist around trusts and you should seek professional financial advice if you’re unsure.
The residence nil-rate band will reduce inheritance tax or mitigate it entirely for many families, but you need to make sure you understand the rules.
If you require any further information on the residence nil-rate band or need help with inheritance tax in general, please do not hesitate to contact us and speak to an independent financial adviser.
Note: rates and thresholds are based on current UK legislation and are subject to change.