What is the inheritance tax residence ‘nil rate’ band?
Inheritance tax has long placed a heavy burden on families during an already difficult period. Announced in the 2015 budget, the inheritance tax residence nil rate band (RNRB) is a measure designed to alleviate this strain for many people. While the addition of an extra layer of relief to the existing inheritance tax structure brings its benefits, it may also appear to complicate a process that was already complex to navigate. Here is everything you need to know in order to benefit from the RNRB.
How does the residence nil rate band work?
Under the existing rules, inheritance tax can only be avoided if a deceased individual’s entire estate is valued at less than £325,000, or if everything over £325,000 is being left to a spouse, civil partner or charitable organisation (ie. not being inherited).
All assets over the threshold of £325,000 are taxed at 40% (although this may be lowered to 36% if 10% or more of an individual’s estate is going to charity). The introduction of the RNRB does not alter this structure per se – the tax rate and exemptions remain the same, and the standard threshold for inheritance tax remains at £325,000.
However, the estate of anyone who died on or after 6 April 2017 and is giving away their residence to direct descendants is eligible for the RNRB. The main benefit of the RNRB is that it adds an extra threshold band for these individuals, increasing the overall limit above which inheritance tax is payable.
How much is the residence nil rate band worth?
Initially the RNRB was set at £100,000 for the tax year 2017 to 2018. It is increasing at a rate of £25,000 per year, meaning it is set as follows:
- £125,000 in 2018-19
- £150,000 in 2019-20
- £175,000 in 2020-21
Having reached £175,000 by April 2021, it will then increase in line with the Consumer Price Index (CPI) from 2021 to 2022 and beyond. Wherever it sits on the above scale, it can effectively be added to the existing threshold of £325,000, meaning that the overall threshold for an individual who meets the criteria in 2019-20 is £475,000.
Is the residence nil rate band transferable?
Like the standard threshold, any unused percentage of the RNRB is transferable from one spouse or civil partner to the other when they die. If the first partner died before 6 April 2017, their entire RNRB is unused because it was not effective until this date, meaning that it too can be transferred to the second partner.
In this instance, the surviving spouse or civil partner could therefore have a RNRB worth up to £650,000. However, the RNRB is not transferable if the value of the first partner’s estate exceeded £2 million and the RNRB has ‘tapered’ off.
What does tapering mean?
Tapering refers to the withdrawal of the RNRB for estates that exceed £2 million. The tapering rate is currently set at 50%, meaning £1 of the RNRB will be withdrawn for every £2 that exceeds this figure. However, the tapering threshold will rise in line with the CPI from the 2021-22 tax year onwards.
Does a residence have to be lived in to be eligible for the RNRB?
A residence does not have to be lived in at the time of death in order to qualify for the RNRB. This means that if an individual has sold a property to downsize, to move into residential care or to live with a relative, the RNRB still applies to their estate, as long as one of the following applies:
- The smaller property forms part of the estate and will pass to direct descendants
- The original property would have qualified for RNRB had the individual still owned it
Can the RNRB apply to more than one property?
Only one property per estate is eligible for the RNRB, even if more than one is being passed to direct descendants. In this instance, it would be up to the personal representatives of the deceased individual to determine which property should fall under the RNRB. Any such property must also have been lived in by the deceased at one time, meaning that buy-to-let properties are not eligible.