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Inheritance Tax - What Is the Residence Nil-Rate Band?

on Tuesday, 23 March 2021.

“In this world nothing can be said to be certain, except death and taxes” wrote Benjamin Franklin in 1789. It is certainly still true that on death, your estate will be taxed at 40% of the value of your assets, exceeding any available tax-free allowances.

The main allowance is the ‘nil-rate band’, currently £325,000, but which may be reduced by the value of any gifts you made up to seven years  before your death.

The Residence Nil-Rate Band (RNRB) was introduced as an additional tax-free allowance from April 2017, and is generally available to be claimed in an estate where an individual leaves their main residence (or the proceeds of its sale) to their direct descendants. The current allowance is £175,000.

Can a RNRB Be Transferred to the Estate of a Spouse?

Unused RNRB allowances can be transferred to the estate of a surviving spouse, even if the first death was before the introduction of the RNRB. The allowance from the first death is known as the transferable residence
nil-rate band, or TRNRB.

What If I Have Sold My Home and Moved to a Care Home?

If you downsize, or sell your home and move to a care home, your estate will not necessarily lose the RNRB. It may still benefit from ‘downsizing relief’ in these circumstances.

What If My Estate Is Valued at More Than £2m?

The RNRB is reduced incrementally for estates valued at more than £2m. The reduction is at the rate of £1 of allowance for every £2 of additional estate value. So, for a single person, the RNRB is lost entirely if the estate is worth £2.35m or more at death. For a married couple, the relevant figure at which both the RNRB and TRNRB are lost is £2.7m.

What If I Am Leaving My Estate in a Discretionary Trust?

The RNRB is only available if the residence (or a share of the residence) is left directly to children/grandchildren. If your Will includes provisions creating a discretionary trust, additional steps may need to be taken to allow the RNRB and TRNRB to be claimed.

Inheritance Tax Workshop Mar21

What If I Own Two Homes?

The RNRB is available in relation to your main home. It must be a home you have lived in, so a buy-to-let property will not count if it has never been your own home.

What If My Home Is Worth Less Than £350,000?

You can only benefit from the RNRB and TRNRB to the extent that you are passing on property to your direct descendants. For properties valued at less than £350,000 the value of the allowance will be reduced.

Does It Apply for Step-Children and Foster Children?

Yes it does. However, if you have no qualifying beneficiaries, your estate will not qualify for the extra allowance.

Get Specialist Advice

It is worth seeking specialist advice if you consider that your estate will exceed £325,000 after debts are paid at your death or that your combined estate with your spouse or civil partner will exceed £650,000.

To ensure that you are aware of all the available tax-free allowances, including the RNRB, please contact Michael Knowles in our Private Client team on 07500 601063, or complete the form below.

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