The residence nil rate band was introduced in April 2017 to provide additional relief from inheritance tax (IHT) when your home is left to your children or other direct descendants.
The intention was to counter the fact that property values have increased significantly since the nil rate band was raised to its current level, £325,000, way back in April 2009.
Of course, tax reliefs are rarely straightforward so there are a number of conditions to meet and exceptions that apply.
This blog runs through the main conditions and outlines the steps you should take to make sure that your estate benefits from the extra relief, which could be worth up to £140,000 in tax saved.
What is the Residence Nil Rate Band?
The residence nil rate band (RNRB) is added to the standard nil rate band and applied to a qualifying residential interest that is left to direct descendants.
The RNRB is currently £175,000 so the total nil rate band for each individual is potentially increased to £500,000.
Any unused RNRB can be transferred to a surviving spouse along with the standard nil rate band so per couple up to £1 million can now be passed down to the next generation with no IHT payable.
What is a Qualifying Residential Interest?
The property in question must be a dwelling that has been the residence of the deceased at some point.
There’s no requirement for it to have been a main residence.
If an individual has more than one property to which the RNRB could be applied then the personal representatives can elect which property should benefit.
Note that the RNRB can only be applied to one property, even if its value is less than the full band available. For example, if an unmarried individual owns two properties worth £150,000 each, then the RNRB applied to the estate would be restricted to £150,000. The remaining £25,000 would be wasted.
Are there any conditions to meet?
As usual, there are conditions that must be met and restrictions to the relief.
- The residence must be left to direct descendants – children, adopted children, step-children and grandchildren – or to the spouses or widows of those direct descendants.
- The amount of the RNRB is reduced if the value of the estate – before applying any reliefs such as business property relief or the spouse exemption – exceeds £2 million. The reduction is £1 for every £2 that this limit is breached so estates with a value of £2.35 million receive no RNRB.
There is a planning opportunity here as any lifetime gifts are ignored so there may be a chance to reduce the value of the estate shortly before death.
What happens if I downsize?
If you sold your home after 8 July 2015 and replace it with one of a lower value than the RNRB, then you can still benefit from the full relief as long as you leave assets of equivalent value to your direct descendants.
For more information
If you can apply the Residence Nil Rate Band to your estate than it could save Inheritance Tax of up to £140,000, so it’s worth making sure that you qualify if at all possible.
If you have any questions or would like any help reviewing your IHT position please contact me.
