First announced by George Osborne in the Summer 2015 budget, and rolled out from April 2017, the Residence Nil Rate Band (RNRB) is an additional ‘allowance’ that can be set against your main residence to reduce the potential Inheritance Tax (IHT) liability upon your death. Its introduction was an overdue acknowledgement by the Government that property prices had increased at such a rate that even those with relatively modest estates were leaving behind an Inheritance Tax bill for their family due to the value of their home.
The Residence Nil Rate Band is available to those who are leaving their main residence to a direct descendant. For the purposes of the Residence Nil Rate Band, HMRC class a direct descendant as a
- child, grandchild or another lineal descendant
- husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)
- child who is, or was at any time, their step-child
- adopted child
- child who was fostered at any time by them
- child where the deceased had been appointed as a guardian or special guardian when the child was under 18
How much is it worth?
The Residence Nil Rate Band is being phased in over a number of tax years and will be:
- £100,000 in the 2017/18 tax year
- £125,000 in the 2018/19 tax year
- £150,000 in the 2019/20 tax year
- £175,000 in the 2020/21 tax year
- Increased in line with the Consumer Prices Index (CPI) from the 2021/22 tax year onwards
Similar to the basic nil rate band for Inheritance Tax, the Residence Nil Rate band is transferable between spouses and civil partners. This means that, in the 2020/21 tax year, a married couple could have a combined Residence Nil Rate Band of up to £350,000. If Inheritance Tax remains at 40%, this would mean a tax saving of £140,000!
What to watch out for
While the Residence Nil Rate Band will certainly help to reduce the Inheritance Tax bills of thousands of people, there are a few cases where it might be unavailable. I’ve highlighted some of these below:
- Where the total value of the estate is worth over £2 million, the RNRB is reduced by £1 for every £2 over this threshold.
- Where the main residence is being left into a trust, even if the arrangement is for the benefit of a direct descendant, the RNRB might be unavailable depending on the type of trust.
- If the property being left to the direct descendant was never a residence of the deceased (e.g. a buy-to-let property) it will not qualify for the RNRB.
Please get in touch with your financial planner if you would like more information on the Residence Nil Rate Band, or a conversation about some of the other ways in which you might be able reduce your potential Inheritance Tax liability.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 9 March 2018. You are recommended to seek competent professional advice before taking any action.
Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.