Residential Nil Rate Band and its implications on the Inheritance Tax Threshold

Jan Atkinson

Table of Contents

The current Inheritance tax (IHT) threshold, known as the nil-rate band (NRB), has been frozen at its current rate of £325,000 until 2021.

The Summer Budget 2015 saw the introduction of the Residential Nil Rate Band (RNRB) and if someone dies on or after 6th April 2017, the estate may be entitled to an additional IHT threshold. For deaths incurring in the tax year 2017-18, the additional amount is up to £100,000 rising in annual increments of £25,000 to £175,000 by 2020-21 and then increasing annually by the Consumer Price Index.

The RNRB can be added to the NRB if the person and their estate meet the qualifying conditions. These are:

  1. The estate must include a ‘qualifying’ residential property. This means that the deceased must have lived in the property at some point during ownership so a buy-to-let property would not qualify. There can be more than one residence but only one will qualify for the RNRB and likewise, there may be no residence at the date of death if the property has been sold. In these circumstances, the downsizing provisions may apply so that the sale proceeds of the last residence may qualify.
  2. The property must pass to a direct lineal descendant. This means a child, grandchild or remoter issue but also includes step, adopted or fostered children. This does not include nieces, nephews or siblings .The property doesn’t have to be specifically bequeathed in a Will as it can be inherited as part of the residuary estate.

As with the NRB, to the extent that the RNRB is unused, it can be transferred (carried forward) to a surviving spouse/civil partner (even if they died before 6th April 2017).

There are some circumstances when the RNRB may not apply so if relevant you should contact us for further advice. These are:

  1. The overall value of the estate cannot exceed £2 million. The RNRB will be reduced by £1 for every £2 that the net estate exceeds this amount.  This means that in the current tax year, there will be no RNRB available if you have assets of more than £2,200,000 (rising to £2,350,000 in 2021-22);
  2. If your property is to pass into a trust or is already held in a trust, it may not qualify for the RNRB, even if all the beneficiaries are lineal descendants. The availability of the RNRB will depend on the type of trust;
  3. If your Will is drafted with a condition that the grand/children have to reach a certain age before they can inherit (i.e. upon them attaining the age of 21), this may also mean that the property (or part of the property) is held in a trust if you die before that age contingency is met. In these circumstances, you should contact us to discuss amending your Will to ensure that your estate qualifies for the RNRB.

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