Main Residence Nil Rate Band
What is the Residence Nil Rate Band?
With the introduction of the inheritance tax (IHT) Residence Nil Rate Band (RNRB) in April 2017, you could save up to £140,000 of IHT if your children are left the family residential property after your death.
The RNRB applies when the main residence is left to your direct descendants (children, stepchildren, grandchildren, adopted children, fostered children and linear descendants) and is in addition to each individual’s nil rate band of IHT which is currently £325,000.
Assuming that you and your spouse qualify for the individual additional nil rate band of £325,000, as well as the RNRB of up to a maximum of £175,000, then by 2020 it will be possible for your family to avoid paying IHT on up to £1 million of assets.
At MJR Solicitors, our expert team of personal representatives can advise you on how to avoid any problems or pitfalls in this area, as well as making sure your affairs have been arranged to maximise any allowances available.
To make sure you’re best placed to take advantage of the RNRB, here are the most important things to know about this IHT allowance...
How much will the RNRB be?
The RNRB was first introduced in April 2017 and will continue to be phased until 2020 when the maximum RNRB allowance of £175,000 will apply. In 2017 the RNRB began at £100,000 and increases each tax year by £25,000 as shown in the table below.
Maximum RNRB available:
- 2017-18: £100,000
- 2018-19: £125,000
- 2019-20: £150,000
- 2020-21: £175,000
Although this table refers to the maximum level of RNRB, this will be adjusted if the value of your property falls below this level.
As an example, if a mother were to die in the 2020/21 tax year and her share of the family property was valued at £160,000 which she gifted to her children, then there would be an excess of £15,000 RNRB which would be unused, (i.e. £175K less £160K). This may, however, be transferred to her surviving husband.
When can the RNRB be transferred?
Similar to the standard nil rate band, the RNRB can be transferred to spouses and civil partners on your death. However, the unused element of any RNRB applied to the estate of the first to die (as per the example above) can be applied to the estate of the second to die. This applies in all circumstances, whether the property was owned at the time of the first person’s death, unless that person’s estate was valued at more than £2 million
Who benefits from RNRB?
The RNRB applies when the main residence is left to direct descendants (children, stepchildren, grandchildren, adopted children, fostered children and lineal descendants). Since its introduction, RNRB has also been extended to include the situation where the property is to be held by the deceased child and their spouse.
Who won’t benefit from RNRB?
For anyone whose estates are valued at a high level, there may be little benefit to be gained from RNRB which is reduced by £1 for every £2 that the net estate exceeds £2 million. In effect, this means that for an estate with assets over £2.2 million, then RNRB represents no benefit, although this will rise to £2.35 million in 2020/21 when the maximum amount of RNRB will increase in line to £175,000.
If my property passes into a trust, does RNRB apply?
If your will states that the family home is to be put into a trust, then RNRB will not apply to your estate. However, it’s possible to ensure this is not the case if an arrangement is made whereby the trust grants the your children or grandchildren an absolute interest in possession of the property. In this case, RNRB will apply as it will in other specific instances, for example 18-25 trusts Disabled Persons’ Trusts and Bereaved Minors’ Trusts.
What if my family home is downsized?
To qualify for RNRB, your family home does not necessarily have to be actually owned at the time of death. This applies if you’ve downsized to a smaller property or sold your home in order to enter residential care, or to live with a member of your family.
In these cases, RNRB will still be applicable provided that the original property that was sold was owned by the deceased and would have in normal circumstances qualified for RNRB. Either the alternative property or the assets raised from the sale of the original property will then form part of the estate for the purposes of RNRB provided that the downsizing or sale of the property occurred before 8th July 2015. However, there are no time restrictions between the sale of the property and the death of the individual.
What if multiple residences are involved?
As far as RNRB is concerned, only one residence can be taken into account and if there are multiple residences, then it’s the responsibility of the deceased’s representatives to nominate which one residence will be used for the calculation of RNRB.
However, any properties in which the deceased was never a resident, for example rented houses and buy to let properties, cannot be considered for RNRB.
What about basic IHT?
The basic IHT nil rate band has been frozen until the end of 2020/21 at a taper threshold level of £325,000. This means, as an example, a married couple’s combined IHT nil rate (£325K x2), plus the full RNRB of £175,000 available in 2010, provides the projected £1 million mil rate band relief.
How are joint tenants and large estates affected?
It’s important to make sure your affairs and estate are arranged in the most tax efficient way so you qualify for the maximum IHT and RNRB. For example, if you hold your property with your spouse as a joint tenant, on the first death, the property will automatically pass to the surviving spouse with no IHT payable due to the spousal exemption element. The full rate of RNRB can then pass to the surviving owner for the benefit of their descendants.
On the other hand, changing the property ownership to the status of ‘tenants in common’ offers each spouse the opportunity to decide exactly what happens to the property after their death. By keeping each of the tenants in common’s assets below the £2 million level, the RNRB entitlements of each individual and their descendants will be protected.
Does RNRB make it important to review a will?
Ever changing legislation and personal circumstances mean that it’s always advisable that wills are reviewed periodically. For example, it would be easy to miss out on the benefits of RNRB if a family property was merely going to be moved into a trust arrangement.
Although it’s relatively easy to arrange a deed of variation to nominate which property passes to an individual, in the case of trusts, which may have multiple beneficiaries, this becomes much more difficult, if not impossible.