Inheritance Tax: Residential Nil Rate Band Allowance: a summary of the main provisions

Residential Nil Rate Band Allowance: a summary of the main provisions

When an individual dies, Inheritance Tax is potentially due on his or her  estate and is charged at a rate of 40% of the overall value of the deceased’s assets and belongings.

On death each individual estate is entitled to an Inheritance Tax exemption known as the Nil Rate Band Allowance (NRB).  Currently the standard NRB allowance is £325,000 and up to this amount an estate should not have any Inheritance Tax to pay.

From 6th April 2017 a new Residential Nil Rate Band Allowance (RNRB) was introduced in addition to the NRB.

The new RNRB will be available so long as the following conditions are met:

  1. The deceased must have held a “qualifying residential interest”. In simple terms he or she must have owned or jointly owned a property.
  2. The property must be inherited by “Direct Descendants” meaning that the property must pass either to the deceased’s lineal descendants such as children or grandchildren or to the deceased’s widow(er).
  3. The net estate value must be less than £2 million i.e. the value of the estate after the assets and liabilities have been taken into account.
  4. If an estate is valued in excess of £2 million, the RNRB that can apply to the deceased’s estate is reduced by £1 for every £2 that the estate exceeds this threshold.

The available Nil Rate Band Allowances until 2021 are set out below:

Tax Year Nil Rate Band Residence

Nil Rate Band

Total Allowance  for Individual Total for married or Civil Partnership Couple
2016-17 £325,000 Nil £325,000 £650,000
2017-18 £325,000 £100,000 £425,000 £850,000
2018-19 £325,000 £125,000 £450,000 £900,000
2019-20 £325,000 £150,000 £475,000 £950,000
2020-21 £325,000 £175,000 £500,000 £1,000,000

The standard Nil Rate Band Allowance has been frozen until 2021.  From 2021, the government have stated that the NRB and the RNRB allowances will increase in line with the Consumer Prices Index,  rounded up to the nearest £1,000.

Transfer of unused RNRB

Just like the standard nil rate band (NRB), any unused RNRB on the first death is transferable so that it can be used on the death of the spouse or civil partner, even if the first death occurred before 6 April 2017.

Will review:

To avoid missing out on the new RNRB we encourage you to review your Will.

The new RNRB allowance is only available if an estate or the property passes to a child or grandchildren.  If you have included a discretionary trust in your Will or you have gifted to someone other than a direct descendant you may lose out on the chance to utilise this additional allowance.

Equally, it is important for a married couple or civil partnership couple to review how their estates are structured and consider the tax implications of leaving their respective estates to each other or to children and what can be done if their combined estate value exceeds £2 million.

While the assets passing between couples (married/civil partnership) would be “spouse exempt” and the unused RNRB allowance would, therefore, be available for transfer to the survivor’s estate if the combined marital estate value exceeds £2 million gifting the property in this way could result in the loss or reduction of the available RNRB due to the effect of the “tapering” of the available allowance.

It is, therefore, important that Wills are reviewed.   We can help you to identify the best way to hold your assets (as tenants in common or as joint tenants) and can also look at the best way to prepare your Will.

The new RNRB allowance rules and calculations can be quite complicated.  This is particularly so where a deceased person no longer owns the family home either because he or she has “downsized” or they have sold the property and moved into residential care as provision has been made in the legislation to offer a discounted allowance in these circumstances.

This discounted allowance is known as the “downsizing addition” and can be claimed where a person has downsized or disposed of his or her property on or after 8th July 2015 whether or not they have replaced the property with one of a lower value.

For further information or to make an appointment please contact Genevieve Gallagher on 0207 408 8896.