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Jun 2017
Residential Nil Rate Band: what is it?
The Residential Nil Rate Band, or RNRB for short, came into effect for deaths occurring from the 6th April 2017 and is an additional allowance for Inheritance Tax (IHT) for property.
When a person dies the first £325,000 of their estate (or £650,000 for married couples) is tax free; anything else on top of this is taxable at 40%. The RNRB allows a further £100,000 tax exemption for 2017/2018 from the deceased’s main residential property on the basis that it has passed ‘down the bloodline’. This increases by £25,000 until the band meets £175,000 in the tax year 2020/2021. Furthermore the allowance for married couples is twice that of an individual.
WHEN DOES THE NIL RATE BAND APPLY?
For the Nil Rate Band to apply the property you are claiming the RNRB for must have been lived in as a sole residential property and must pass directly down the bloodline. For estates that value of £2m there is a reduction on the RNRB by £1 for every £2 you are claiming relief for. The RNRB also only applies on death and is not subjective on any other legacies of gifts given under the Will.
HOW DOES THE RNRB APPLY?
The Nil Rate Band is limited to the lowest value of the property left to direct descendants. The RNRB is applied to the estate as a whole first and then the Nil Rate Band is applied. The RNRB cannot be applied to another property in other estates if the value of the first property left to descendants is less than the £325,000 Inheritance Tax Limited.
The RNRB can be transferred between spouses if it is not used in whole or partially by the first spouse upon their death. The RNRB can be lost upon your death if you do not own a property at the time or your death or if your direct descendants do not inherit a property from you on the event of your death. The RNRB may also be lost if the property is left in a trust stating a direct descendant cannot inherit until a certain age. The band may also be lost if your estate exceeds the £2m threshold.
EXAMPLE
Mr A dies in the tax year 2020 to 2021 and leaves a home worth £300,000, and other assets worth £190,000 to his children.
The maximum available RNRB in tax year 2020 to 2021 is £175,000.
| RNRB for the estate | £175,000 (the lower of £300,000 and £175,000) |
| NRB | £325,000 |
| estate value | £490,000 |
| less RNRB | – £175,000 |
| remaining value | £315,000 |
| less NRB | – £315,000 |
| value that Inheritance Tax (IHT) is due on | £0 |
In this case the whole of the RNRB has been used up, but £10,000 out of the available NRB of £325,000 is unused and can be transferred to Mr A’s wife.
Source: www.gov.uk/government/case-studies/inheritance-tax-residence-nil-rate-band-case-studies
For advice on Wills or Inheritance Tax contact our team on 0800 015 0340 to arrange an initial free half hour appointment at any of our offices in Huddersfield, Halifax, Wakefield, Horbury, Leeds, Pudsey or Morley.
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