5 Important Considerations with respect to the Residence Nil Rate Band

The residence nil rate band (RNRB) took effect from 6 April 2017, and increased in 6 April 2018 from £100,000 to £125,000. It will further increase each year until 2020/21 when it will reach £175,000.

The RNRB only applies to the death estate and cannot be utilised for lifetime gifts, unlike the standard nil rate band.

The stated aim of the allowance was to make it easier to pass on the family home to children and grandchildren without the burden of inheritance tax.

Whilst the RNRB cannot be used for lifetime planning, it should always be considered in conjunction with other planning in order to ensure that the available potential relief is maximised where possible.

Here are 5 important areas to consider within the RNRB provisions:-

1. Transferable allowance

​A claim can be made to transfer the proportion of any unused RNRB from a pre-deceased spouse to be utilised within the surviving spouse’s estate. This is available even where the pre-deceased spouse died prior to the introduction of the RNRB, or where they did not own any residential property at that time. However the available proportion may be subject to the taper provisions below.

It is important to consider carefully the choice between passing on value at the first death or transferring the allowance to the survivor. During the transition phase, it is likely that greater relief may be obtained by transferring the RNRB, assuming that the value of the residence already exceeds the available RNRB. This will need to be considered carefully alongside the tapering provisions.

However, where at least one party to a marriage or civil partnership has survived a previous partner, it may be advantageous to make use of the RNRB on the first death of the current marriage, rather than to carry it forward. This is because the maximum brought forward allowance is restricted to 100% of the residential enhancement.

2. Tapering provisions

​The default allowance is reduced where the value of the deceased estate exceeds the taper threshold of £2 million. The estate for this purpose is the value prior to deducting relief (such as Business Property Relief) or exemptions (such as spouse or charity).

Where the estate of the first to die exceeded the threshold, this will need to be reflected in the calculation of their adjusted allowance and hence any brought forward allowance in the estate of the survivor.

3. Qualifying residences

For a property to be a qualifying residence, the deceased must have had an interest in a property which has been occupied as that person’s residence at some point during their period of ownership and which would have been part of their estate.

If a person’s estate includes only one such property, that property will be the qualifying residence. Where a person’s estate includes more than one residence, only one residence will qualify and it is up to the deceased’s personal representatives to make an appropriate nomination.

Where the value of the qualifying residence is less than the available relief, the amount of the RNRB is limited to the value of that residence. Any unused excess is available for transfer to a spouse or civil partner. However, where the value of the property passing is greater than (or equal to) the available relief, the RNRB will be fully used and the excess property value will form part of the total estate to be taxed or relieved against the basic NRB as appropriate.

4. Qualifying beneficiaries

The RNRB is set against the value of a residence passing to qualifying beneficiaries. It is not necessary for the residence itself to be specifically bequeathed to those beneficiaries.

In order to claim the relief, value equal to the value being claimed must be inherited by lineal descentants, that is a child, grandchild, etc or the spouse of a lineal descendant.

A lineal ancestor, ie parent, will not benefit from the RNRB. Neither will other relatives such as siblings, nieces and nephews, or other cohabitants and joint owners.

Complications can arise when an estate is left to a combination of qualifying and non-qualifying beneficiaries and advice should be sought if this is likely to be the case.

Although the amount of RNRB is calculated with reference to the qualifying residence and qualifying beneficiaries, it is applied to the total value of the chargeable estate rather than the residence directly, meaning that all chargeable beneficiaries may actually benefit from the relief in proportion to their inheritance.

5. Downsizing

In recognition of the fact that many older people move to a smaller home or into residential care, there are provisions to compensate for downsizing. They apply to those who downsize or sell their homes on or after 8 July 2015. In essence, the RNRB remains available to set against the higher value of the original home provided that higher value is still represented in the death estate.

As you can see, the provisions can actually be quite complicated and therefore it is sensible to check whether your estate is likely to receive the relief, and if not, whether any planning can be put in place in order to ensure the relief is available, alongside a more general inheritance tax planning review.