The Residence Nil Rate Band (RNRB) is an additional Inheritance Tax (IHT) allowance that applies in the UK if certain conditions are met. It started in April 2017 and is available in addition to the general Nil Rate Band (NRB) which is currently £325,000. The RNRB was phased in over four tax years and now stands at £175,000.
This means that an individual could potentially leave £500,000 tax free to their children when they die and if a married couple or a couple in a civil partnership leave everything to each other, a full spouse exemption will apply on the first death and on the second death the unused NRB and unused Residence Nil Rate Band (RNRB) allowances are preserved and can be transferred to the second spouse/civil partner resulting in tax free assets of up to £1,000,000 passing to their children.
The RNRB is available if a person owned their own property and leaves their property to their direct descendants. It is limited to the maximum value the person held in a residence.
What is meant by owning a property?
A person must have owned an interest in a property at the date of their death. If they have sold, gifted, or downsized to a less valuable home on or after 8th July 2015 then special rules on downsizing may apply if certain other conditions are met. Therefore, all may not be lost if a person has found it necessary to sell their home to go into residential care for example.
The word property can even include a holiday home or a rental property if the deceased once lived there. If someone owns a buy to let that was specifically purchased to rent out and they have never lived there, then it will not be possible to claim the RNRD against that property.
What is meant by direct descendants?
The property must be closely inherited by Will or under intestacy by direct descendants. This definition is wider than you may think and whilst it does not include nieces and nephews it includes, children, grandchildren, stepchildren (although not the children of an unmarried cohabitee) and more, so it is advisable to check that your beneficiaries come within the definition.
It is worth noting that complications can arise in claiming the allowance if a person’s house is put in trust either in their lifetime or after their death. Age restrictions applied to gifts could also result in the RNRB being lost.
Finally, the RNRB is not available to all people who own a property and leave it to direct lineal descendants. If a person’s estate exceeds £2,000,000 taper is applied and the relief is reduced by £1 for every £2 that it exceeds £2,000,000. If the value of a person’s estate exceeds £2.35 million there is no RNRB available at all. Careful estate planning between spouses can therefore be very important.