The Residence Nil Rate Band (RNRB)
As a Will adviser, I am frequently called upon to consider the implications of inheritance tax (IHT) to clients’ estates. Most understand that there is a threshold below which IHT is not an issue for them, this is called the Nil Rate Band (NRB).
What few realise is that whilst inflation and house prices have driven estate values up – by many tens’ of percent in a majority of cases. The NRB has remained static since April 2009, at £325,000.
This is in stark contrast to the preceding two decades in which it rose by 103,000 and £104,000 respectively. https://www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates/inheritance-tax-thresholds-and-interest-rates
Where does the RNRB fit in?
In mitigation of this stasis, and observing that the bulk of peoples’ estates lay in real property, Chancellor George Osborne announced the Residents’ Nil Rate Band in 2015.
In practice, the RNRB has the effect of removing some or all of the value of a family home from an estate, for IHT calculation purposes, in certain circumstances cases.
In the 2020/21 tax year, the threshold for RNRB will be £175,000 (rising in line with inflation therefrom). For clarity the remainder of this piece applies this figure in calculations.
What are the qualifying criteria for RNRB?
The RNRB benefit that is available to you amounts to the net value of your family home (or interest in it) up to £175,000. Crucially, it can only be used when a property is ‘closely inherited’ i.e. bequeathed to a direct descendent, including (but not limited to): children, step-children and grandchildren.
Thus, if you’ve a property worth £175,000, with a mortgage of £75,000 and £400,000 in cash, the net value of your property (£175,000-£75,000 = £100,000) will be eliminated from IHT calculations. The £75,000 in cash which exceeds the NRB threshold (£325,000), however, will remain subject to IHT at 40%. The unused RNRB simply goes unused in such instance and an IHT bill of £30,000 would be payable
Taking the above example, were £75,000 of the available cash to be used to pay down the mortgage, the net value of the property would now be £175,000 and the cash £325,000. In this case, the full RNRB could be applied to the value of the property and IHT liability would be reduced to zero.
Can RNRB be transferred?
RNRB can be transferred between spouses/civil partners on first death, in a similar manner to the NRB. The effect of this on a couple’s estate’s IHT liability, can be impressive, conferring an effective £1m IHT exemption.
By way of example: John and Kelly have one child, Paul, and jointly own a £600,000 property and £400,000 in cash. On John’s passing, the property and cash pass fully to Kelly by survivorship (being jointly owned). John’s NRB of £325,000 and RNRB of £175,000 also pass to Kelly. Thus when Kelly leaves her estate of £1m to Paul, there is no IHT liability.
Things to Remember
Before I finish, there are a couple of points worthy of consideration.
Firstly, the RNRB does not apply to unmarried couples with children. In these cases, it might be worth partners’ considering the passage of half of the property’s value to offspring, on the first partner’s death. In this way, RNRB can be applied individually. Certain trust arrangements might be useful to optimise this process.
Secondly, the RNRB is subject to an upper limit, tapering off in the case of estates valued in excess of £2m.
Finally, the full RNRB may be available to you, even if you have downsized (post July 2015), to the extent that you have replaced your home with another property or retain assets of an equivalent value to the original property, and bequeath these to lineal descendants.
IHT can be enormously frustrating, we recommend seeking the very best advice when creating a will. Confidence Wills are leading advisors in such matters. Contact us now with for more information.