Inheritance Tax Planning – Using The Residence Nil Rate Band

What is the Residence Nil Rate Band?

The nil rate band (£325,000 in the tax year 2022/2023) is the amount which is chargeable to IHT at the rate of 0%. From 6 April 2017, an additional residence nil rate band (RNRB) applied so that less IHT may be paid when the family home is left to ‘direct descendants’ being children, grandchildren or limited other people.

The RNRB could help those who inherit your assets make an additional IHT saving by increasing the part of your estate that is taxed at 0% rather than 40%. Claiming the RNRB could enable an additional £175,000 (£350,000 for couple) worth of assets to pass to the next generation without a charge to IHT.

The RNRB is applied to an estate first and then the nil-rate band (currently £325,000) is applied. If the value of the property is less than the RNRB, the balance cannot be offset against other assets in the estate. Both the Nil-Rate Band (NRB) and the RNRB will be frozen until 5 April 2026.

Will my estate benefit from the allowance?

Your estate will benefit from the RNRB, in addition to the main nil rate band, if you leave your interest in the family home to direct descendants. Children or grandchildren are the main descendants people automatically think of (including stepchildren or foster children) but this also includes the spouses or civil partners of any of these (”qualifying beneficiaries”).

The RNRB can be claimed if all of the following apply to you:

• You leave your home to qualifying beneficiaries.
• You leave an estate valued at less than £2m. The RNRB is tapered down for estates worth more than this and may be lost entirely. The £2m value does not allow any offsetting for assets that qualify for Business Property Relief or Agricultural Property Relief (ie the full value of those assets are included in the calculation to qualify for the RNRB)

Transferrable to a Spouse?

If leave your home to your spouse or civil partner rather than children or grandchildren, the RNRB is not necessarily wasted as it can be carried forward (together with any unused main nil rate band) for the benefit of your surviving spouse or civil partner and offset against their estate on their death.

What if I sell my home?

The RNRB will still be available where you have sold your home and downsized to a less valuable property, or even if you no longer own a property, provided that you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary.

What if I move out of my home?

The RNRB will apply if you own a property that is no longer your residence when you die (for example, because you have moved into a care home), provided that it was your residence at some time during your period of ownership.

What if my children do not want my home after I die?

It does not matter whether the qualifying beneficiaries who inherit your home want to keep it. The RNRB will still be available even if they sell your home immediately after your death.

What if I have more than one home?

If you own more than one property that is (or has previously been) your residence when you die, your executors must choose which one will benefit from the RNRB.

EXAMPLES OF COMMON SITUATIONS

Example 1: Paul and Claudia want the survivor to have a life interest in their property

Paul and Claudia are married and jointly own their home. They have three adult children. Paul’s Will includes a Property Will Trust leaving his share of the property for Claudia to have a life interest in his half of the home after he dies and for his three children to inherit his half when Claudia dies. Claudia’s Will mirrors Paul’s. If Paul dies before Claudia his estate will not benefit from the RNRB but Claudia’s estate can carry forward his unused RNRB as well as using her own RNRB when Claudia dies.

Example 2: David and Caroline are not married

David is not married or in a civil partnership. He owns his home jointly with his partner Caroline who is a widow. Caroline has two adult children from her marriage. David cannot benefit from the RNRB because he does not have any children and Caroline’s children do not qualify for his allowance as they are not married or in a civil partnership. Caroline could benefit from the RNRB if she leaves her interest in the family home to her children but not if she leaves it to David. If David and Caroline were married, David could use his RNRB because Caroline’s children would be his stepchildren.

Example 3: Douglas has sold his home

Douglas is a widower with two adult children. His wife died in 2014. He sold his home in August 2015 and now lives in a rented, warden-assisted flat. Even though he no longer owns a property, he can benefit from the RNRB if he leaves some of his estate to his children. He can also carry forward his wife’s unused RNRB even though she died before 6 April 2017 when the RNRB was introduced.

Summary

The RNRB is a useful IHT mitigation tool as part of estate planning. Care may need to be taken to ensure an estate is less than £2m to secure the allowance for HNW individuals and to ensure the allowance is not lost through existing lifetime or Will planning.

Our Private Client solicitors include members of the Society of Trusts and Estates Practitioners, the internationally recognised body of leading professionals in the areas of estate planning and trusts, and are available to provide advice on Inheritance Tax. This is often in conjunction with Independent Financial Advisers and/or accountants to ensure a holistic approach to your estate planning.

Should you consider that you may need advice in relation to Inheritance Tax then contact our experienced team at your local Clark Willis office.