Inheritance planning: How to take advantage of the Residence Nil Rate Band (RNRB)

How to take advantage of the Residence Nil Rate Band RNRB

Inheritance tax (IHT) is due on death estates and certain lifetime transfers of assets. Some homeowners and taxpayers may be surprised to learn that, over a certain estate valuation threshold, inheritance tax will be due on their death estate. However, there are certain IHT reliefs, such as the Residence Nil Rate Band (RNRB), that you can take advantage of in order to minimise your IHT bill, leaving your children and grandchildren with more assets at a tax-free rate. However, to take advantage of such IHT relief, you’ll need to navigate complex laws and meet certain conditions. If you’re ready to start an inheritance planning conversation, please contact us at Hello Estate Planning. 

On a taxpayer’s death, an estate valuation is carried out to determine the estate’s net worth. If the estate exceeds a certain limit, IHT will be payable. To understand RNRB, it’s important to note that in the context of the death estate, tax is charged at 40% on the value over your available nil rate band (NRB). With certain exceptions like gifts to spouses and charities. Additionally, if you gift 10% of your estate to charity, you’ll reduce your IHT payable from 40% to 36%. To learn more about what reliefs are available to you, please contact us for a consultation. 

To calculate RNRB, you’ll need the lower of either the net value of the qualifying residence (after deducting liabilities) or the ‘Residential Enhancement’ which is currently £175,000. 

RNRB is available if the following criteria are met: 

  • Your estate contains a ‘qualifying residential interest’, or a house that was used by the deceased as their private residence
  • The residential interest passes either through a Will or under the rules of intestacy 
  • Only lineal descendants can receive the residence (including children and grandchildren as well as step children and adopted children, or their spouses, but not nieces and nephews). This relief is not available to couples or individuals without children. 

More importantly, the descendants of the deceased are not required to live in the residence after death. In fact, they are permitted to sell the property and obtain the cash proceeds without impacting the NRB. 

There are other points to consider. First, RNRB is applicable to the death estate only, as this does not apply to a lifetime transfer of a residence. Crucially, if your estate exceeds £2 million in net value, RNRB is tapered at a rate of £1 for every £2 over the £2 million limit. Moreover, if you’re domiciled in the UK, you are liable to IHT on transfers of your worldwide assets, wherever they may be. On the other hand, if you’re domiciled outside of the UK, you’re liable to IHT on transfer only of your UK assets. Finally, spouses can transfer any unused RNRB between each other on death. If a taxpayer survives more than one spouse, the total allowance brought forward is capped at 100% of the RNRB for any given tax year. 

Overall, the RNRB is a relief measure implemented by the UK Government in April 2017 to help families pass on a larger portion of their residence to their children, tax-free. As this article outlines, there are various conditions that must be met prior to claiming this relief. If you’re interested in learning more about how you can capitalise on the RNRB, please contact Hello Estate Planning today. Our team delivers friendly, highly bespoke services.