This Practice Note aims to guide practitioners to Q&As and worked examples of the principles under which the inheritance tax (IHT) residence nil rate band (RNRB) (also known formally as the additional threshold) and the transferable RNRB (brought forward allowance) are calculated and applied on the death of an individual on or after 6 April 2017. For general information on the RNRB, see Practice Note: IHT—residence nil rate band.

It should be noted that Q&As are not currently maintained and state the law as at the date indicated.

For information on the basic NRB and the transferable NRB and in particular how these reliefs are claimed and relevant deadlines, see Practice Notes: IHT—nil rate band (NRB) and transferable NRB, The transferable nil rate band and Calculation of NRB and transferable NRB.

Identifying the qualifying residential interest

The RNRB is available to be set against the deceased’s whole estate up to the value of a residential property interest passing to qualifying beneficiaries. It is not necessary for the residence itself to be specifically bequeathed to those beneficiaries.

The legislation defines a qualifying residential interest (QRI). The main condition is that the deceased must have had an interest in a property which was occupied as that person's residence when they owned it and which would have been part of their estate on their death. Where the deceased leaves a QRI to a defined lineal descendant on death, then the RNRB is likely to be available subject to satisfying the other conditions of the relief.

Property not main residence

While the QRI must have been a residence of the deceased at some point, there is no requirement that the QRI is the deceased’s main residence nor that it is their actual residence at death. For further commentary, see Residence nil rate band—Scope of relief: Simon's Taxes [I4.162].

References:
IHTM46031

Property abroad

There is no requirement in the definition of ‘residential property interest’ that the QRI relates to a property in the UK. Therefore, the RNRB can be available where the deceased leaves a QRI in an overseas property which is closely inherited provided that it is not excluded property at the date of death. However, note that succession to an overseas property may be subject to local law which may impact the value which is closely inherited. See also IHTM46032.

References:
Inheritance Tax Act 1984, s 8H(2)

This scenario was considered in Q&A: Would a French property owned by a UK domiciled individual qualify for the residence nil rate band? What, if any, provision should the individual make in their Will?

Several residential property interests

Where the deceased held more than one type of interest in a single property at death, such as where part of the property was held on trust for the deceased for life and the other part was held by the deceased outright, then the deceased’s combined interests in that property are a QRI for the purposes of the RNRB.

References:
IHTA 1984, s 8H(3)

This scenario was considered in Q&A: Would the residence nil rate band be available if the first spouse to die creates a life interest (an immediate post-death interest) in their Will over one half of a residential property interest for the surviving spouse and remainder to their children?

Where the deceased held interests in more than one property and more than one of those residential property interests could qualify as a QRI, then the personal representatives (PRs) must nominate which residential property interest is to be the QRI for the purposes of claiming the RNRB.

References:
IHTA 1984, s 8H(4)
For further information, see IHTM46011.

Property given away before death

Unlike the basic NRB, the RNRB is not available to be set against lifetime gifts.

References:
IHTA 1984, s 8E
However, if the deceased reserved a benefit in the property given away such that the gift with reservation of benefit (GROB) rules apply then a QRI given away is treated as forming part of the deceased's estate on death. Provided that the donee of the original gift of the QRI is a defined lineal descendant and the other relevant conditions are met, then the RNRB will be available up to the value of the QRI which is closely inherited.

References:
IHTA 1984, s 8J(6)
In order to avoid the GROB rules applying and the pre-owned asset tax charge, some donors choose to pay a full market rent while continuing to benefit from property given away. The effect of paying the full market rent might be to remove the property from the GROB regime but in so doing also to deny the availability of the RNRB on death (ie if the property is treated as remaining in their estate as they have not survived seven years from when they stopped enjoying the benefit of the property).

Therefore, where an individual or a couple decide to pass on the value of their home to their children before they die, there is a risk of losing the RNRB relief and ending up with an increased IHT liability if death occurs within seven years. The downsizing provisions will not assist unless sufficient value representing a QRI is retained in the estate at death (ie either a residential property interest or the proceeds of sale) and that value passes to lineal descendants.

This scenario was considered in Q&A: Is the inheritance tax residence nil rate band available where the deceased had gifted their home to their children and/or grandchildren within seven years before death but continued to live there paying them a market rent?

For a worked example of the potential loss of the RNRB following a lifetime gift, see example 1 in Practice Note: IHT—residence nil rate band.

References:
Example 1—calculation of the default allowance

Property settled on discretionary trust during lifetime

As noted above, the RNRB is not available to set against lifetime gifts. When an individual has settled property on discretionary trust during their lifetime, then neither the property nor its value will be in their estate at death for IHT purposes. As such, there will be no QRI in the estate on death and the RNRB will not be available.

This scenario was considered in Q&A: If a settlor places a property worth between £900,000 and £1m into an inter vivos discretionary trust, will they lose their residence nil rate band on death?

Property qualifying for the conditional exemption

Property which qualifies for conditional exemption under section 31 of the Inheritance Tax Act 1984 ( IHTA 1984 ) is excluded from also qualifying for the RNRB. However, if there is a chargeable event at a later date such that the conditional exemption no longer applies, then the rate of charge to IHT will take account of the RNRB not used on the deceased's death (because of the conditional exemption) and not used up as a transferable RNRB in the intervening period by a spouse or civil partner.

References:
IHTA 1984, ss 8M , 31 , 32 and 32A

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Identifying whether or not the qualifying residential interest is closely inherited

The RNRB is only available where a QRI is ‘closely inherited’ on the deceased’s death.

References:
IHTA 1984, ss 8J, 142 and 144

'Inherited' is defined as meaning that the property passes from a person who has died and the property formed part of his estate immediately before he died. The disposition of the property may be effected by Will under the law relating to intestacy or 'otherwise', which would include the passing of joint property by survivorship, a QRI passing by a deed of variation with the application of IHTA 1984, s 142 or an appropriate appointment of a QRI from a discretionary trust within two years of the death applying IHTA 1984, s 144. 'Closely inherited' is defined as inherited by a lineal descendant, that is a child, grandchild and remoter issue. Lineal descendant is taken to include an adopted child, step-child, foster child or ward in cases where a person has been appointed as guardian. Lineal descendants of the step-child, etc are then included in the qualifying beneficiaries even if they were born before the step-child became related to the deceased. Beneficiaries may also include the widow, widower or surviving civil partner of a lineal descendant provided they have not remarried.

References:
IHTA 1984, s 8k

Domicile and residence status of deceased

The RNRB is available to non-UK domiciled and non-UK resident individuals. All individuals (wherever domiciled) are entitled to the basic NRB if property is subject to UK IHT. The RNRB is an extension of the basic NRB and is likewise available provided the condition of residency at some stage can be shown such that there is a QRI.

This scenario was considered in Q&A: Is the inheritance tax residence nil rate band available to non-UK domiciled and non-UK resident individuals?

Property held as joint tenants

The term ‘inherited’ includes the passing of a QRI under a joint tenancy by survivorship. Therefore, if the deceased had a QRI in a property held as joint tenants with a defined lineal descendant, then the RNRB would be available. If the joint tenancy was with a third party (non-descendant), then the RNRB would not be avail-able in relation to that property interest.

References:
IHTM46033

Settled property passing on death of deceased

Where a QRI was already ‘settled property in which the deceased was beneficially entitled to an interest in possession’, then the RNRB may be available where the QRI is closely inherited on the testator’s death. Provided that the QRI passes to a defined lineal descendant (either outright or within the permitted forms of trust interest) immediately on the deceased’s death, then the RNRB should apply. The definition of the term ‘settled property’ may be found at IHTA 1984, s 43.

References:
IHTA 1984, ss 8J(3) and 43

However, as noted above, where a property was already settled on discretionary trust by the time of the deceased’s death, such that the deceased was not beneficially entitled to it at the time of death, then there is no QRI in the deceased’s estate and so the RNRB will not be available. Even if the property subsequently passes to the deceased’s direct descendants, the RNRB will not apply as there was no QRI in the de-ceased’s estate on death.

This scenario was considered in Q&As:

Property occupied under a lease for life or where lease is surrendered immediately following death

Where the deceased occupied a property under a lease for life, the right to occupy is extinguished automatically on death and there will be no interest in that property in the deceased’s estate. Therefore, there will be no QRI to pass on and the RNRB will not be available.

If the property is owned by third party who becomes entitled to the reversionary interest on the expiration of the lease for life, then on the third party owner’s subsequent death, their estate may have the benefit of the RNRB if the property is a QRI and is closely inherited.

This scenario was considered in Q&A (published before the RNRB was available): Will the RNRB be available where the occupier of the property had a lease for life?

A similar scenario, in which the deceased occupied a leased retirement property subject to the requirement that the lease was surrendered on death in return for a specified sum was considered in Q&A: Is a lease of a retirement property (whose terms state that, on death, it is surrendered and the deceased's estate receives a refundable residence fee (ie the purchase price)) a qualifying residential interest for the purposes of the residence nil rate band?

Property left to direct descendants with right of occupation for third party or a descendant

Where the deceased leaves property subject to a right for a third party to occupy for a period of time and then for the property to pass to the deceased’s children, the availability of the RNRB will depend on whether or not the QRI is treated as passing directly to the children (such that it is closely inherited). This will depend on the wording in the deceased’s Will or letter of wishes.

This scenario was considered in Q&As:

Where the right of occupation or residence is left to a direct lineal descendant of the deceased, who also inherits the property, the availability of the RNRB is clearer to determine.

This scenario was considered in Q&A: Would the residence nil rate band be available where the testator (T) leaves residential property to their children (A and B), with a right of residence for A?

Option to purchase property from estate

Where the deceased has left a QRI outright to a direct descendant in their Will but with an option for a third party (non-descendant) to purchase the property from the PRs with the proceeds passing to the original beneficiary, the RNRB may still apply.

In IHTM46033, HMRC set out their views on the meaning of ‘closely inherited’:

‘The actual residence does not have to end up in the hands of the deceased’s direct descendants. An estate could still be eligible for the RNRB if the deceased’s personal representatives sell the residence as part of the administration of the estate and pass the sale proceeds to the direct descendants.

Equally a gift in the deceased’s will directing the personal representatives to sell the deceased’s residence with the sale proceeds being paid to a direct descendant would be treated as the residence being closely inherited.’

A testamentary option arises when a person, by their Will, directs that a beneficiary should have the option of purchasing property forming part of the estate. As explained in Talbot v Talbot, on exercise of that right, the beneficiary enters into a contract with the PRs. The nature of a testamentary option is uncertain though and the person entitled to the option may not get the asset because the PRs might have to sell it to pay debts or testamentary expenses. The treatment of testamentary options is not specifically addressed in the above-mentioned HMRC guidance, nor in the legislation relating to the RNRB (IHTA 1984, ss 8D–8M.)

References:
Talbot v Talbot [1968] Ch 1
Re Eve [1956] Ch 479

This scenario was considered in Q&A: A testator (T) is the sole legal and beneficial owner of a residential property. T resides at the property with A. If T were to grant an option in his Will to A to purchase the proper-ty, would that affect the ability of T’s personal representatives to claim the residence nil rate band on T’s death?

Conversely, where a QRI is left to a third party with a direct descendant having an option to purchase the property, the RNRB is unlikely to be available as the QRI would not be treated as closely inherited on the deceased’s death. See commentary Preliminary note: Williams on Wills Precedents [209.3].

Property left by deceased on discretionary trust

Property left by the deceased to a discretionary trust or other relevant property settlement on death will not qualify for the RNRB unless the trustees make an appointment out to lineal descendants within two years of the deceased’s death and this is read back into the Will under IHTA 1984, s 144. Otherwise, while no direct descendant has an absolute entitlement to the property interest, it cannot be said that the QRI is closely in-herited or even inherited. This is the case even if the discretionary trust beneficiaries are limited only to defined lineal descendants of the deceased.

References:
IHTA 1984, s 144

Where the deceased left property to a discretionary trust which is subsequently appointed out to the deceased’s spouse, this rearrangement (ie the appointment) might enable the spouse to leave a QRI on death to direct descendants such that the spouse’s estate can benefit from the RNRB, as well as possibly the transferable RNRB.

This scenario was covered in Q&As:

Property left by deceased on trust for an individual for life and then to direct descendants

Where a testator leaves a QRI to be held on trust for a non-descendant for life and then for direct descendants absolutely, the RNRB will not be available on the testator’s death as the life tenant who has the immediate post-death interest in possession in the QRI is not a direct descendant and so the QRI is not closely inherited at that stage.

If the life tenant is the spouse or civil partner of the deceased, then the deceased’s unused RNRB may be available to transfer to the spouse or civil partner’s own estate. When the QRI passes to the testator’s children on the second spouse’s death, the second spouse’s estate could have the benefit of the transferable RNRB from the testator’s estate and their own RNRB on the basis that the QRI is closely inherited by their own children or step-children (depending on the family circumstances). For example, if an individual leaves their holiday home on an immediate post-death interest (IPDI) for their spouse for life and then to their children, the surviving spouse’s estate could benefit from a double RNRB (being the transferable unused RNRB from the first spouse's estate and their own RNRB).

This scenario was covered in Q&As:

However, where the life tenant is not the spouse or civil partner of the testator, either an unmarried partner or a third party—then the testator’s unused RNRB will not be available to transfer to the life tenant’s estate (as they were not married). Nor would the life tenant’s estate benefit from their own RNRB when the QRI passes to the testator’s children unless they are also the third party’s own children, ie the children of a deceased cohabitee would not satisfy the conditions for closely inherited in the same way as step-children would.

This scenario was covered in Q&A: Would the residence nil rate band be available where a residential property interest is left on trust for the deceased’s unmarried partner for life with the remainder to the deceased’s children?

Property left on trust for successive lives and then to non-lineal descendants

Where a testator leaves a QRI to be held on trust for a non-lineal descendant for life, the RNRB will not be available on the testator's death as the life tenant who has the immediate post-death interest in possession in the QRI is not a defined lineal descendant and so, the QRI is not closely inherited at that stage. If the QRI subsequently passes on trust to the first life tenant’s children for life, then the RNRB may be available, subject to other qualifying conditions. Where the QRI subsequently passes to another individual absolutely (on the death of the last successive life tenant), the availability of the RNRB at that stage will depend on the relationship between the last life tenant and the remainderman.

This scenario was considered in Q&As:

Qualifying residential interest left on trust subject to age contingency

Where the QRI is left on trust such that it becomes settled property following the deceased’s death, it is only ‘closely inherited’ for RNRB purposes if the trust qualifies as an IPDI, a disabled person’s interest, a be-reaved minor’s trust (BMT) or an 18–25 trust.

Where the QRI is left on trust for an individual contingent on them attaining a specified age, commonly the age of 18, 21 or 25 years old, there can be some surprising results.

Generally (and subject to limited exceptions), in order to qualify as a BMT or an 18–25 trust, it is necessary for the QRI to pass under the Will of the beneficiary’s deceased parent. Therefore, a QRI passing on trust under a parent’s Will to a minor child contingent on attaining a specified age up to 25 years old is likely to qualify for the RNRB but one passing under a grandparent’s Will to a minor grandchild contingent on attain-ing a specified age probably will not.

This scenario was considered in Q&As:

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Calculating the amount of the residence nil rate band where there is a qualifying residential interest in the estate which is closely inherited

Where the qualifying residential interest passes to a direct descendant

The amount of the RNRB available to an estate will depend on the value of the QRI which is closely inherited on the deceased’s death (subject to the other qualifying conditions). The available RNRB will be the lower of:

  • the value of the QRI or the share that is closely inherited at the date of the deceased’s death, and
  • the maximum RNRB available at the date of the deceased’s death

If the value of the QRI is more than the available RNRB, then the estate will benefit from the full RNRB.

For worked examples of how the RNRB is calculated, see HMRC guidance—Inheritance tax—residence nil rate band.

Transferable residence nil rate band

In a similar way to the transferable basic NRB, estates may also benefit from a transferable RNRB (known formally as the brought forward allowance) of unused percentage of the RNRB allowance from the estate of a predeceased spouse or civil partner.

References:
IHTA 1984, s 8G

Therefore, married couples and civil partners are able to leave their entire estate to each other on the first death (if they wish) and transfer any portion of unused RNRB to the survivor’s estate to apply on the survivor’s subsequent death. This applies only when the second death is on or after 6 April 2017. It also relies on the second spouse having a QRI (or its value or qualifying former residential interest (QFRI)) in their estate which is closely inherited on death and also on the second spouse’s estate not exceeding the £2m taper threshold.

References:
IHTA 1984, s 8D(5)(g)

As there was no RNRB before 6 April 2017 where the death of the first spouse occurred before 6 April 2017, the transferable RNRB will always be 100% of the residential enhancement in force at the later death of the second spouse, subject to the downsizing addition and the taper threshold.

References:
IHTA 1984, s 8G

This scenario was considered in Q&A: Can the transferable nil rate band and transferable residence nil rate band be claimed when the first spouse died in 1971?

Where an individual has survived two or more spouses or civil partners, the calculation is done for each estate and the unused percentages added together. However, the total amount of transferable RNRB available to an individual’s estate from predeceased spouses or civil partners is subject to a maximum of 100%.

An individual may have benefited from the unused RNRB of a spouse or civil partner before remarrying. As the RNRB and transferable RNRB are aggregated on death, it is possible for the estate of the spouse or civil partner in the subsequent relationship to benefit from the RNRB transferred to their spouse or civil partner on the death of the former spouse or civil partner. Again, the amount available on any individual’s death is restricted to double the individual RNRB.

For a worked example of how the transferable RNRB is calculated and applied on the second death, see example 1 in Practice Note: IHT—residence nil rate band.

References:
Example 1—calculation of the default allowance

Where the qualifying residential interest passes to a mixture of direct descendants and others

Where the QRI passes to a mixture of direct descendants and others on the deceased’s death, it is only the value of the share of the QRI which passes to direct descendants (ie is closely inherited) that applies for the purposes of calculating the available RNRB.

This scenario was considered in Q&A: A testator wishes to grant a 12-month right of occupation of his residence to his partner (they are unmarried) under his Will with the property passing thereafter as to 80% to his children and 20% to his partner. Does the residence nil rate band (RNRB) apply when a residence passes to children following a period of occupation such as this? Also, can the RNRB apply where descendants only receive a share of the residence as in this case?

For a worked example of how the RNRB is restricted to the portion of the value of the QRI which is closely inherited, see examples 1 and 3 in Practice Note: IHT—residence nil rate band.

References:
Example 1—calculation of the default allowance and Example 3—limiting factors

Note that the amount of RNRB available will then apply to the estate as a whole, so will benefit all the beneficiaries not just those who receive the QRI.

In some circumstances, the Will drafting will affect the amount of RNRB available. Where a QRI is left to a beneficiary who is not a direct descendant and other assets or the residuary estate are left to direct descendants, the estate will not benefit from the RNRB as there is not a QRI which is closely inherited. It may be possible to rectify the position by use of a suitable deed of variation pursuant to IHTA 1984, s 142.

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Calculating the downsizing addition

The downsizing addition may be available where what would have been a QRI was disposed of on or after 8 July 2015 and there is no QRI or a lower value QRI in the estate at death. The residential property interest that would have been a QRI had it been in the deceased’s estate at death is known as a QFRI.

References:
IHTA 1984, ss 8FB and 8H

If a person is entitled to a downsizing addition, the actual amount will be the lower of the lost relievable amount and the value of the assets or property which are closely inherited on the death. If there is no longer any QRI in the estate at death, the available RNRB will be equal to the downsizing addition.

References:
IHTA 1984, s 8FB(7)

The lost relievable amount will therefore need to be calculated. This is the additional percentage of the default or adjusted allowance which can be set against non-residential portions of the estate. It represents residential value which would have been there if the deceased had not downsized.

For a worked example of how the downsizing addition is calculated, see example 4 in Practice Note: IHT—residence nil rate band.

References:
Example 4—calculation of the downsizing addition

See also HMRC guidance—How downsizing, selling or gifting a home affects the additional inheritance tax threshold. See also commentary Residence nil rate band—Downsizing relief: Simon's Taxes [I4.164].

The calculations of the downsizing addition can be complex and may be avoided (or checked) using the HMRC—Additional threshold calculator. Links to various scenarios are provided below. It should be noted that for the interaction of the downsizing addition and the transferable RNRB in some cases it will make no difference whether or not the first spouse died before 8 July 2015 or not and whether or not downsizing or sale of the QFRI took place before 6 April 2017.

Downsizing addition for individual—qualifying former residential interest sold before 8 July 2015 and no qualifying residential interest in the estate at death

The downsizing addition is only available where a QFRI was sold on or after 8 July 2015. Therefore, where the QFRI was sold before that date and there is no other QRI in the estate, the RNRB will not be available on the deceased’s death.

Downsizing addition for individual—qualifying former residential interest sold after 8 July 2015 and no qualifying residential interest in the estate at death

This scenario is considered in the example appearing under the heading ‘Working out the lost additional threshold’ on pages 2–3 of HMRC guidance—How downsizing, selling or gifting a home affects the additional inheritance tax threshold.

Downsizing addition for individual—downsized after 8 July 2015 and smaller qualifying residential interest in the estate at death

This scenario is considered in the examples appearing under the heading ‘Downsizing to a less valuable home’ on page 4 and calculating the additional threshold on page 5 of HMRC guidance—How downsizing, selling or gifting a home affects the additional inheritance tax threshold. It is also considered in example 2 of Residence nil rate band—Downsizing relief: Simon's Taxes [I4.164].

Downsizing addition and transferable residence nil rate band—first spouse died and qualifying former residential interest sold between 8 July 2015 and 6 April 2017 and no qualifying residential interest in the second spouse’s estate at death

Where the first spouse died before 6 April 2017, the usual position would be that the transferable RNRB would be 100% of the RNRB available on the second death. However, where there is no QRI in the estate on the second death, it is also necessary to calculate the downsizing addition which requires consideration of the amount of transferable RNRB that would have been available at the date of the sale of the QRI. Where this also occurred before the RNRB was actually available (ie before 6 April 2017), then at the date of the sale or downsizing, no transferable RNRB would have been available. The appropriate proportion of the transferable RNRB may need to be added in to the calculation later on.

This scenario was considered in Q&A: How do the brought forward allowance and the downsizing addition interact for the purposes of the residence nil rate band (RNRB) where both the disposal of the qualifying former residential interest (QRFI) and the death of the first spouse were before 6 April 2017?

Downsizing addition and transferable residence nil rate band—downsizing between 8 July 2015 and 6 April 2017 and smaller qualifying residential interest in the second spouse’s estate at death

This is a slightly simpler scenario than the one above in that the transferable RNRB was available at the date of the first spouse’s death.

This scenario is considered in the example appearing under the heading ‘Downsizing before 6 April 2017’ on page 6 of HMRC guidance—How downsizing, selling or gifting a home affects the additional inheritance tax threshold. It is also considered in examples 5 and 6 of Residence nil rate band—downsizing relief: Simon's Taxes [I4.164].

Downsizing addition and transferable residence nil rate band—qualifying former residential interest sold after 6 April 2017 and no qualifying residential interest in the second spouse’s estate at death

Where an individual who has survived their spouse or civil partner who died before 6 April 2017 subsequently sells their home after that date and then dies with no residential property interest in their estate, it is necessary to calculate the transferable RNRB and lost RNRB as part of the downsizing addition calculation.

This scenario was considered in the example appearing under the heading ‘Working out the lost additional threshold’ on pages 2–3 of HMRC guidance—How downsizing, selling or gifting a home affects the additional inheritance tax threshold. It is also considered in example 4 of Residence nil rate band—Downsizing relief: Simon's Taxes [I4.164].

Downsizing addition and transferable residence nil rate band—downsizing after 6 April 2017 and smaller qualifying residential interest in the second spouse’s estate at death

Where an individual who has survived their spouse or civil partner downsizes at some point after 6 April 2017, then the same calculations apply. The transferable RNRB is likely to be 100%, but the combined RNRB on the second spouse’s death may be affected by the downsizing calculations.

This scenario was considered in Q&A: If a spouse owns a property in their sole name, downsizes from it to a less valuable property in their sole name and on death leaves the less valuable property in a life interest trust with their spouse as life tenant and the children from a previous marriage as remainder, can the surviving spouse's executors claim the transferable residence nil rate band and a downsizing allowance? and is also covered in example 4 in Practice Note: IHT—residence nil rate band. It is also considered in example 1 of Residence nil rate band—Downsizing relief: Simon's Taxes [I4.164].

References:
Example 4—calculation of the downsizing addition

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Taper threshold

Where the estate exceeds the taper threshold

If the deceased’s net estate (ie after debts and liabilities are deducted) is worth over £2m at death, then the RNRB will be tapered at a rate of £1 for every £2 over the £2m threshold. The taper threshold applies to calculate the available RNRB on the estate of any individual, whether they are the first or second of a couple to die and whether or not the RNRB is to be claimed or the unused RNRB is to be passed on to the surviving spouse’s estate as the transferable RNRB, ie even if the RNRB is not used on the death of the first spouse, the RNRB available to be transferred to the survivor’s estate may still be tapered.

For a worked example of how the RNRB is tapered for estates valued over £2m, see example 2 in Practice Note: IHT—residence nil rate band.

References:
Example 2—calculation of the adjusted allowance

This is also considered in the final example of HMRC guidance—Inheritance tax—residence nil rate band, as well as in example 6 of Downsizing relief: Tolley's Inheritance Tax 2017–18 [52.16].

Applying the residence nil rate band and how to claim it

Where the basic nil rate band, transferable nil rate band and residence nil rate band are all available

It is clear from the wording of Schedule IHT435 that the RNRB should be applied before the basic NRB and the transferable NRB.

References:
Form IHT435—Claim for residence nil rate band (RNRB)
PDF Format


In the case of the second death of a married couple or civil partners, in practical terms it may make no difference that the RNRB is deducted from the estate before the NRB on the basis that the unused portion of each relief will be lost as there is no surviving spouse or civil partner for it to be transferred to. This does assume that the surviving spouse’s estate will contain a QRI which is closely inherited and that the net estate is below the taper threshold.

However, in the case of the first spouse or civil partner to die, the application of the RNRB on the first death ahead of the basic NRB could affect the portion of the unused reliefs available to transfer to the surviving spouse or civil partner. In circumstances where the RNRB threshold is set to rise over the coming years and the basic NRB is not, this could impact on the final IHT bill on the surviving spouse’s death.

This scenario was considered in Q&A: Where an estate qualifies for the basic nil rate band (NRB) and the residence NRB (RNRB), do the personal representatives have a choice which relief is claimed on the first death and which is left unused to transfer to the surviving spouse’s estate? If the RNRB is being claimed before the transferable NRB, can this be done on the IHT205 form or is an IHT400 required?

Choice of not applying the residence nil rate band and allowing it to be transferred to the surviving spouse or civil partner’s estate

If an individual leaves a QRI to lineal descendants such that the RNRB is available, then provided the relevant conditions are met, the PRs appear to have a choice as to whether or not to actually claim the RNRB on the individual’s death or leave it unused so that 100% transferable RNRB will be available to the surviving spouse’s estate on their subsequent death.

However, IHTA 1984, s 8D(2) states that:

References:
IHTA 1984, s 8D(2)

‘If the person's residence nil-rate amount is greater than nil, the portion of [value transferred by the chargeable transfer under section 4 on the person's death] that does not exceed the person's residence nil-rate amount is charged at the rate of 0%’

A strict interpretation of this legislation is that the RNRB is applied automatically. Indeed, HMRC's guidance on the application of the RNRB includes a number of example calculations which show the RNRB is always applied in priority to the basic NRB. This also suggests that the RNRB must be claimed.

References:
HMRC guidance—inheritance tax—residence nil rate band


At this stage, it is not known how HMRC will approach an estate where the RNRB is potentially available but not claimed. Whether HMRC would include the RNRB in their IHT calculation (based on a strict interpretation of the legislation) even if it is not claimed on submission of the IHT400, remains to be seen.

This scenario was considered in Q&A: Where there is a qualifying residential interest (QRI) in an estate which qualifies for the additional residence nil rate band (RNRB) on the deceased’s death, are the PRs able to choose not to claim the RNRB and instead allow it to be carried forward to apply on the deceased’s surviving spouse’s death (assuming there is a QRI in the survivor’s estate as well)?

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Claiming the residence nil rate band

In order to claim the RNRB, the deceased individual’s PRs are prompted by questions 29a and 29b of the IHT400 account to complete claim for Form IHT435. Notes are found on pages 5–7. The RNRB can only be claimed as part of a full IHT400 application. If the PRs wish to claim any unused RNRB from the deceased’s predeceased spouse or civil partner, Schedule IHT436 must also be completed.

References:
Form IHT435—Claim for residence nil rate band (RNRB)
PDF Format
Form IHT436—Claim to transfer any unused residence nil rate band
PDF Format
Form IHT435—Claim for residence nil rate band (RNRB) (including notes)


The requirements for claiming the RNRB and the transferable RNRB were considered in Q&A: How should the residence nil rate band be included within the IHT400 Calculation pages?

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