Extra tax-free allowance introduced on 6 April 2017
The Residence Nil Rate Band (RNRB) is an extra tax-free allowance introduced on 6 April 2017. It is applicable to estates where a residence or its value is inherited by the deceased’s direct descendants, including children or grandchildren. For the 2024/25 tax year, the maximum RNRB is £175,000, which offers relief to those whose estates surpass the £325,000 Nil Rate Band (NRB) threshold for Inheritance Tax.
One key feature of the RNRB is its transferability between spouses or registered civil partners. Any unused allowance from one partner can be transferred to the surviving partner’s estate, even if the first death occurred before the RNRB was introduced. This could potentially lead to a combined threshold of £1 million for married couples or civil partners when taking property values into account.
How the RNRB works
Unlike the standard NRB, the RNRB does not apply solely to the home’s value but is deducted from the entire taxable estate. However, it is crucial to note that the allowance is capped at the value of the residence passed to direct descendants. If the property’s value is less than the RNRB limit, the remaining allowance cannot be applied to other parts of the estate.
Additionally, the RNRB diminishes for estates valued at over £2 million. For every £2 above this threshold, the allowance is reduced by £1. This becomes significant for larger estates, as the full benefit of the RNRB may no longer apply. Importantly, this tapering rule considers only the estate’s gross value without accounting for reliefs or exemptions.
Who qualifies as a direct descendant?
To utilise the RNRB, the residence or its value must be passed to ‘direct descendants’. This includes biological children, grandchildren, stepchildren, adopted or fostered children, and their respective spouses or civil partners. However, siblings, nieces, nephews and other relatives are excluded from this definition, making it essential to ensure that inheritance plans align with the requirements.
The RNRB cannot be claimed if the deceased had no direct descendants. Additionally, depending on the type of trust or inheritance arrangement, properties held in trust or those left to someone other than a direct descendant may not qualify. Given the complexities surrounding trusts, professional advice should be sought to determine eligibility.
Downsizing provisions
The RNRB also accommodates individuals who have downsized or sold their property on or after 8 July 2015. This ‘downsizing addition’ ensures that those who move to a less valuable home – or cease to own a home altogether – are not penalised, provided that assets of equivalent value are left to direct descendants.
To utilise this provision, the property sold or disposed of must have otherwise qualified for the RNRB, and an appropriate claim must be submitted. It’s important to note that the downsizing addition is limited in scope; it cannot exceed the maximum RNRB and is reduced by the value of any assets directly inherited by descendants.
Additional planning considerations
Strategic planning is essential for estates exceeding the Inheritance Tax threshold. For example, lifetime gifts may reduce the overall value of an estate, while careful use of the NRB and RNRB allowances ensures minimal tax liabilities. The timing of inheritance arrangements and the proper structuring of trusts or joint ownership agreements can also play a role in maximising tax efficiency.
Meticulous planning becomes even more important for estates approaching the £2 million mark. Since tapering rules reduce the RNRB for larger estates, determining how assets are structured and valued at death is vital. This may involve exploring inheritance options or using available reliefs to ensure the smooth transfer of wealth to future generations.
Practical steps for claiming the RNRB
To claim the RNRB or the downsizing addition, personal representatives of the deceased’s estate must submit a claim to HM Revenue & Customs within two years of the end of the month in which the individual passed away. This underscores the importance of accurate documentation and professional guidance, especially when managing more complex estates.
Property selection is another critical aspect. When an estate includes multiple properties that the deceased has lived in at some point, the personal representatives have the flexibility to determine which property should receive the RNRB. This decision can significantly impact the estate’s overall tax liability.
