Residence Nil Rate Band & What It Means For You

The new RNRB, also known as Family Home Allowance, can effectively increase your inheritance tax threshold.

When someone dies, the total value of their ‘Estate’ (meaning everything he/she owned) must be valued. If the total value is above a certain threshold, Inheritance Tax must be paid. Presently, the threshold for Inheritance Tax is £325,000 for an individual or up to £650,000 if you’re married.

In April 2017, a major change to inheritance tax (IHT) law came into effect with the launch of the Residence Nil Rate Band (RNRB)

However, as of April 2017, people who own a property (or shares in the property) and are leaving it to their ‘direct descendants’ are entitled to an additional allowance. This is called the Residence Nil Rate Band (‘RNRB’) and it effectively increases the threshold for Inheritance Tax.

RNRB Inheritance Tax Rates

When anyone dies, the first £325,000 of their estate is free from inheritance tax. This is the nil-rate band (‘NRB’) that was already in force. The NRB can be reduced by certain gifts made in the seven years prior to death.

From 6 April 2017, the first £100,000 of a home’s value is also exempt from inheritance tax, on the basis that it passes to a ‘direct descendant’ (this threshold will rise by £25,000 every year to £175,000 by 2020/21). The NRB can then be applied to the balance of the value of the property and/or other assets in the estate.

Scenario 1

Example for single person

Mr X died on 6 April 2017.

He is divorced and leaves his estate to his daughter.

His estate comprises his home, worth £350,000 and cash assets, worth £75,000.

His executors can claim the RNRB against the first £100,000 of his home, bringing the value of his combined estate down to £325,000. The full NRB can then be deducted, meaning that no inheritance tax is due.

Scenario 2

Example for a married couple

Mrs X died on 7 April 2017 leaving her estate to her daughter. Her husband died in 2015 leaving his share of the estate to her, meaning no inheritance tax was due at that time.

Her estate comprises her home, worth £700,000 and cash assets worth £250,000.

The executors will be able to deduct Mrs X’s RNRB (£100,000) and NRB (£325,000), as well as the unused RNRB and NRB of her spouse. This means that IHT is only due on the remaining £100,000 of the estate.

Direct Descendants

In order to use the Residence Nil Rate Band, the person who died must have left their home, or a share of it, to their ‘direct descendants’.

For the purposes of the Residence Nil Rate Band, a direct descendant is a:

Child, grandchild or other lineal descendant of the deceased person
Spouse or civil partner of a lineal descendant (including the deceased’s widow, widower or surviving civil partner).
Child who is, or was at any time, the deceased person’s step-child
Child to which the deceased had been appointed as a guardian or special guardian while the child was under the age of 18
Child who was fostered at any time by the deceased person, or
An adopted child of the deceased person

Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the list above.

Leaving your property to a descendant in a trust

Passing your property or share of in to a trust (even if the trust is for the benefit of a direct descendent) may result in the estate missing out on the Residence Nil Rate Band.

Given the complexity of the legislation, to benefit from this new relief it is essential that you revisit your will to ensure that it is drafted in such a way that allows the relief to be claimed.

People with the following arrangements should certainly have them reviewed:

If you own your home as tenants in common and intend to place the share of the first to die in a discretionary trust
If your wills have left the estate of the first to die on life interest trusts to the survivor and/or include discretionary trusts for the children/grandchildren on the second death
If you leave property to anybody other than your direct descendant.

If you or a family member has a Will that includes a discretionary trust, do not panic!

All may not be lost as it is possible to vary the terms of the Will after death to maximise the relief if this is dealt with within two years.