Malcolm Finney takes a look at some important features of the inheritance tax residence nil rate band.
Inheritance tax (IHT) is levied on death at the penal rate of 40%. Any reliefs and exemptions available to reduce the amount on which this 40% charge is levied should be utilised to the full.
Two key reliefs are the nil rate band (NRB) and the residence nil rate band (RNRB). For present purposes, this article looks at the RNRB.
RNRB conditions and application
The RNRB is a relatively new form of relief applying with respect to deaths occurring on or after 6 April 2017. The RNRB applies where a residence is owned and is inherited by the deceased’s children.
Its amount varies according to the tax year of death. For the tax years 2017/18 and 2018/19, the maximum RNRB was £100,000 and £125,000 respectively. For the current tax year 2019/20, it is £150,000, rising to £175,000 for 2020/21.
There are three conditions which must be satisfied for the RNRB to apply.
The deceased must own a residential property at the date of their death (note the possibility of ‘downsizing relief’), which at some point during their period of ownership qualified as their residence (i.e. was lived in as a home). It does not need to have been their main residence; nor does it need to have been their residence at the date of death.
The residence must be inherited on death (i.e. inherited under a will or under an intestacy or by survivorship) by the deceased’s lineal descendants (e.g. children; grandchildren; adopted children; step-children; referred to as ‘closely inherited’).
The RNRB operates by reducing the net estate of the deceased chargeable to IHT (as does the NRB; the RNRB taking precedence over the NRB).
Failure to meet the RNRB conditions
The implication of these conditions is that those without children or who on death do not leave their residence to be inherited by lineal descendants or those who have never owned a residence do not qualify for the RNRB.
Transferability of the RNRB between spouses
Many married couples own their home jointly (i.e. not as tenants-in-common), in which case on the death of the first spouse to die their interest automatically passes to the surviving spouse. In such cases, the RNRB will not be available on the death of the first spouse to die.
However, on the death of the surviving spouse, the latter will qualify not only for their own RNRB but will also be able to utilise the unused RNRB of the first spouse to die (measured as a percentage).
Example: Transferred RNRB (and NRB)
Mr and Mrs Smith own their home jointly. The home is worth £1,000,000.
They each have a bank account in which savings are £50,000 each.
Mr Smith dies in 2019/20. His estate amounts to £550,000. He leaves all of it in his will to Mrs Smith, who leaves everything to their daughter. No IHT charge arises on Mr Smith’s estate as it is exempt due to it all being left to his wife. He has therefore not used his RNRB (or indeed his NRB).
The IHT charge on Mrs Smith’s death is computed as follows:
40% x (£1,100,000 - £150,000 - £150,000 - £325,000 - £325,000) = £60,000.
Mrs Smith’s estate is entitled to her own RNRB and NRB plus those of her husband (as he didn’t use either).
Practical Tip:
Note that the common practice of putting a share of a home in an NRB discretionary will trust means the RNRB will not be applicable.
