The new Inheritance Tax residence nil rate band (RNRB) was introduced in 2017 with one sole aim: to make it easier for direct descendants to inherit the family home, without losing a huge chunk of its value in inheritance tax. This is something that has grieved many families for decades. This year, the allowance has increased, so we’re looking at what it means for you.
How does RNRB work?
At the moment, when someone dies and their estate is valued at less than £325,000, they fall into the nil rate band (NRB) and no inheritance tax is payable. With the new scheme, if they own or co-own a property and leave it to a direct descendent, they may also qualify for RNRB, which in effect, is an extra allowance of £175,000 (and due to rise year-on-year, in line with the Consumer Price Index).
But one important point before we go any further. We’re only talking about property left to a direct descendant here. So, if you have no children and decide to leave everything to your niece, nephew, sibling, or other relative or friend, RNRB won’t apply at all. Sorry. We don’t make the rules!
Twice the tax savings
Married couples and those in civil partnerships have always been able to combine their NRB allowances. So, if your partner dies before you, their allowance will be added on to yours. And the RNRB allowances work in the same way. That means your combined NRB allowance could be £650,000 and your combined RNRB allowance £350,000, giving a total tax-free threshold of £1 million. The only thing to remember is that if your partner died before the scheme started in April 2017, the RNRB would not have been available then, so won’t apply now.
Own more than one property?
This is where it can get a bit complicated. The RNRB is limited to one residential property – so if you own another home you need to nominate which one you want to qualify, or your executors will be asked to do that when you die. It’s also worth remembering that you can’t nominate a property you’ve never actually lived in, like a buy-to-let. That’s why it’s called the ‘residence’ nil rate band.
Downsized or moved into care?
Don’t panic, with this scheme, your descendants may still be able to benefit. That’s because the family home doesn’t need to be owned at the time someone dies to qualify for RNRB. The rules around this are quite complicated, so it’s worth getting some individual professional advice if this applies to you. Broadly, you will still benefit if:
Beware some of the pitfalls
An estate over £2 million?
If the value of your estate is likely to tip over the £2 million point, then the amount of RNRB you can use will be reduced or tapered. This will happen at a rate of £1 for every £2 that your estate goes over £2 million. That currently means that if your estate is worth more than £2,350,000, you’ll be entitled to no extra RNRB allowance.
A family home put into trust?
If your property is placed in a discretionary trust for the benefit of your children or grandchildren, you could risk losing the RNRB. However, with some trusts, like life interest trusts for married couples, you’ll still be ok. Rather than bombard you with all the details here, we can advise you if that applies to you.
Want to know more?
We’ll admit, none of this is particularly straightforward. So, if you’re keen to make the most of the RNRB allowances and ensure as much of your estate passes onto your loved ones as possible, get in touch and we’ll help you understand your own personal picture. Talk to us, we’d love to help you.