In previous articles, we’ve looked at many of the reliefs available to mitigate inheritance tax. In this issue we provide a little more detail around the residential nil rate band (RNRB), the rules and restrictions, and how this relief works (and most importantly how it can benefit you) when your home is passed down to your children.
The basic detail
Let’s start off with how RNRB works. At present, upon death, an individual’s estate is liable to inheritance tax at 40% on the value of their assets that exceed the current inheritance tax threshold of £325,000.
Since its introduction on 6th April 2017, if an individual leaves an interest in their family home to their direct descendants (usually the children or grandchildren) then they may also benefit from the RNRB of £175,000. This effectively brings the tax-free threshold up to £500,000.
In the case where all of your assets are left to your surviving spouse, your estate qualifies for 100% spouse exemption. This preserves both the inheritance tax threshold and the RNRB allowing them to be transferred to your surviving spouse.
Chris Beard, Tax Manager at Foxley Kingham commented:
“For many families, the existence of the RNRB is a useful tool to assist them in mitigating inheritance tax. In many cases, it has enabled married couples to leave their assets to each other on the first death, safe in the knowledge that upon the death of the remaining spouse, the inheritance tax threshold of £325,000, along with the RNRB that each individual qualifies for, will provide a maximum tax-free amount of £1million to pass to their children or grandchildren.
As with most things, however, there are rules and restrictions around the residential nil rate band. And those undertaking estate planning must have full understanding of them, usually through consultation with their financial advisor.”
RNRB restrictions
Whilst the RNRB will benefit many estates and families here in the UK, the amount that can be claimed is restricted when the value of your estate totals more than £2million. In such a case, the amount of RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. For example, if your estate is valued at £2.1million, your RNRB claim will be reduced by £50,000. The relief will be lost in its entirety if your estate exceeds £2.35million.
On top of this, the RNRB can only be used against your home. As an example, this means that if your property is valued at £150,000, the £25,000 remainder of the RNRB will be lost and cannot be offset against other assets in your estate.
However, if the value of the home exceeds the RNRB but your entire estate remains below £500,000, no inheritance tax will be due.
Transfer of the RNRB
As we’ve already mentioned, the RNRB can be transferred to the surviving spouse. But there are some cases where an element of the RNRB has been used upon the death of the first spouse. In these scenarios, the amount of the allowance is calculated by referring to the unused percentage of the residential nil rate band that was claimed on the first death.
Bear in mind that the relief has not always been £175,000. When it was introduced in April 2017, the maximum amount of the RNRB was £100,000, increasing by £25,000 each year thereafter up until 2020/21 where it has remained at this current level.
To give an example, if the first death occurred in June 2017 when the RNRB was £100,000, and a claim was made for just £80,000 it would have left 20% of the relief unclaimed. On the second death, 20% of the current rate of RNRB (20% x £175,000) would be available to be transferred from the first death.
Where the first of the couple died before 6th April 2017 their estate would not have used any of the RNRB – as it had not yet been introduced. In these circumstances 100% of the RNRB is still available to be transferred to the surviving spouse, unless the estate was worth more than £2 million where the relief is still restricted.
Downsizing Allowance
It’s definitely worth noting, that even if you have sold, given away, or downsized to a less valuable home before your death, your estate may still be able to claim RNRB.
Providing the event took place after 8th July 2015, the home would have qualified for RNRB if they had lived there up until they died, and if the direct descendants are inheriting from the estate then a claim for 100% of the RNRB can still be made.
Chris Beard said:
“The RNRB is beneficial to those with descendants who own or have owned their own property. When it comes to various ways of mitigating inheritance tax, this can potentially give rise to up to £140,000 in tax savings.
It is important that you review your wills to ensure they are up to date and balanced against the current rules so that when the time comes, you know your loved ones will benefit to maximum effect.”
If you would like to discuss your options when it comes to estate planning, please get in touch with our team of experts.