The RNRB in a nutshell
The residence nil rate band (introduced in 2017) is an addition to the ordinary nil rate band (NRB), which can reduce the inheritance tax (IHT) payable on death. Like the NRB, it charges IHT at 0% (the ‘nil rate’) on certain assets, up to a limit.
Broadly, it is available where a residence is left to direct descendants on death. This additional allowance is dependent on the value of the property in the estate, and the nature of the descendants’ inheritance.
The purpose of this allowance was to make it easier to pass on the family home to children and grandchildren without the burden of IHT. However, it is the subject of much criticism within the industry due to the complex nature of the legislation and the resulting calculations.
The basic calculation of the RNRB
When first brought in the allowance was capped at £100,000, although this has now risen to £175,000. This is now fixed until 5 April 2021, when it will increase in line with the Consumer Prices index.
Where the value of the residence passing to the children is less than £175,000, the amount of the RNRB available will be the lower amount. Take, for example, a qualifying residence (valued at £300,000) which passes equally between the deceased’s child and a charity. The maximum RNRB available will be £150,000, not £175,000.
Once the amount of the RNRB has been established it is applied to the whole estate (rather than just reducing the IHT on the residence itself).
Can the RNRB be transferred, like the basic NRB?
Yes – where the predeceased spouse or civil partner has not used all of their RNRB, the unused amount can be transferred for use on the second death. Just like the basic NRB, the amount transferred is the equivalent percentage. This is important where the RNRB has increased between the two deaths.
Like the NRB, an estate can benefit from a transferred RNRB from more than one predeceased spouse or civil partner, but always up to a maximum of 100%. Where an estate benefits from a full transferred NRB and a full transferred RNRB, the first £1m will be charged at 0% (£325k + £325k + £175k + £175k).
Can high value estates still qualify?
The RNRB is tapered for estates worth £2 million and over. The RNRB is reduced by £1 for every £2 above this £2m threshold. So, an estate valued at £2,100,000 will lose £50,000 of its RNRB.
When considering if the £2m is exceeded, the estate is valued before any reliefs or exemptions are applied. However, the value of any lifetime gifts that are potentially taxable to IHT are not included (these are usually ones made within seven years of death).
Which properties can qualify for the RNRB?
The legislation applies to a ‘qualifying residential interest’. The main condition is that the deceased must have owned a property which has been occupied as that person’s residence during their period of ownership (not necessarily at their death).
If a person’s estate includes only one such property, that property will be the qualifying residence. Where a person’s estate includes more than one residence it is up to the deceased’s personal representatives to nominate one. If the deceased lived in job-related accommodation and also owned a home which they intended to occupy in due course, that property can be treated as a qualifying residence.
Who must inherit the property?
To qualify for the RNRB, the property must pass to direct lineal descendants. The legislation is quite generous – as well as meaning children and grandchildren, it can include spouses and civil partners of descendants and even adopted, foster and step children.
The inheritance can arise through a Will, under the laws of intestacy or even through survivorship (where, say, a parent and child owned a house jointly).
What about trusts and the RNRB?
Trustees of some life interest trusts can benefit from the RNRB where the trust owned a property that was the residence of the beneficiary (and that beneficiary dies).
When a trust is created by Will, the estate can still benefit from the RNRB if the beneficiary of the trust is a direct descendant. Not all trusts qualify, the notable exception being discretionary trusts.
What if the deceased sold their house or downsized?
There are rules in place which award a proportion of the RNRB to an estate if the deceased sold their house or downsized. These rules are designed so that individuals who are required to move into long term care are not penalised.
What about the RNRB and lifetime gifts?
The RNRB is only available for assets which form part of the death estate for IHT purposes. If the deceased made gifts within seven years of death, these can affect the IHT position. However, the RNRB cannot be used to reduce the IHT on these gifts (unlike the basic NRB).
The exception to this is where a person has made a gift of their residence to a direct descendant and continued to live in the property. The property will still form part of the estate (because of the anti-avoidance provisions) and so the RNRB can potentially be claimed.