The residence nil rate band: what is it and how does it work?
The amount of inheritance tax (IHT) received by the government has increased steadily over each of the past seven years*. Several reasons explain the increase, from rising asset prices, including property and stock market values, to the fact the threshold has remained static at £325,000 since April 2009 and will remain unchanged until at least 2020/21.
However, to provide some relief, the government has introduced the residence nil rate band (RNRB) aimed at reducing or eliminating the IHT payable on your main residence when you die.
How does it work?
If a homeowner dies after 5th April 2017, the RNRB may increase their estate’s IHT threshold and, consequently, reduce or eliminate the liability to tax. If death occured in the 2017/18 tax year, then the additional nil rate band was £100,000 but this is increased over the next three years as follows. After which it will then increase each tax year in line with CPI.
• £125,000 in 2018 / 2019
• £150,000 in 2019 / 2020
• £175,000 in 2020 / 2021
As with the standard nil rate band (currently £325,000), any unused percentage of residence nil rate band can be transferred to a surviving spouse or civil partner.
For the additional band to be applicable, the deceased must have left their home, or a share of it, to their direct descendants, which are classed as either a:
- child (including step-children, children adopted or fostered at any time and children to whom the deceased was appointed guardian before the child turned 18);
- other lineal descendant; or
- a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner).
However, direct descendants don’t include nephews, nieces, siblings and other relatives.
Are there any further restrictions?
Only one home, which the deceased must have owned and lived in at some point, will qualify for the higher threshold. If the deceased owned more than one home, the executor of the estate can select which one to set against the higher threshold.
Furthermore, the property doesn’t have to be in the UK, but it does need to be within the scope of IHT, which usually depends on the deceased’s domicile status and the property’s location.
Buy to let investment properties, which the deceased owned but never lived in, don’t qualify, nor do properties which are left to a trust. Furthermore, if the deceased’s estate is worth more than £2 million, the additional threshold will be reduced by £1 for every £2 over £2 million. This is known as tapering.
Consequently, in the current 2018/19 tax year no RNRB will be available if the deceased’s estate is worth in excess of £2.25 million, rising to £2.35 million in 2020/21.
How does downsizing affect the RNRB?
If the deceased moved to a lower value home or gave away their property, their estate may still qualify for the additional threshold.
This is known as a downsizing addition. To apply, the person must have downsized on or after 8th July 2015; their former home must also have qualified for the additional threshold had they kept it. Finally, some or all of their estate must have been left to direct descendants.
The downsizing rules are complex and require expert advice, especially if trusts are involved. However, as a rule of thumb the downsizing addition will normally be equal to the additional threshold that’s been lost when the former home was sold or disposed of.
Despite being introduced nearly a year ago, we find that the RNRB is often overlooked or misunderstood. There’s no doubt it is complex legislation too, which means existing arrangements should be carefully reviewed.
However, if used correctly, it will allow most people to reduce the amount of tax paid on their death, leaving more to their family and good causes.
The Financial Conduct Authority does not regulate taxation and trust advice. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual’s circumstances.