Tim Palmer looks at the residence nil-rate band for inheritance tax purposes and when it can be claimed.
The residence nil rate band (RNRB), which is currently £175,000, increases the inheritance tax (IHT) nil-rate band of £325,000 when, in very general terms, the family home is inherited by children, grandchildren or other lineal descendants.
Who, what and when?
The RNRB can be transferred between spouses or civil partners in a very similar manner to the main IHT nil-rate band. The RNRB cannot be set against lifetime transfers made within the seven years prior to death. The RNRB is set off against the value of the estate ahead of the IHT nil-rate band. It is, therefore, an additional allowance for IHT purposes, for deaths occurring after 6 April 2017. The maximum RNRB of £175,000 has been frozen until 5 April 2026.
To claim the RNRB of £175,000, there must be an eligible property which has been bequeathed to qualifying children on death. In most cases, this will be a residential property which, at some point, has been the home of the deceased taxpayer. Qualifying children include children, grandchildren, fostered, adopted and stepchildren.
Example 1: No IHT to pay
Lucy was a single parent who died on 2 October 2022. Her estate is worth £500,000, including her flat, which is worth £400,000, which she bequeaths to her daughter Amy. The estate would be eligible to claim both the RNRB of £175,000 and the main nil-rate band of £325,000, leaving no IHT payable.
If the value of the property is lower than the RNRB, the balance of the RNRB cannot be offset against any other assets in the estate.
The RNRB is available to be transferred between spouses if it is not used up fully on the death of the first spouse, even if that death occurred prior to 6 April 2017.
Example 2: Transferable RNRB
Bob and Laura are married with one child, Callum. Bob died on 4 December 2021 and left all his assets to his wife, Laura. His estate was worth £700,000, including his half-share of the family home worth £400,000. Laura died on 7 July 2022. The value of her estate was £975,000. She left everything to Callum.
Bob’s RNRB of £175,000 can be claimed by Laura’s executors on her death. There will additionally be two IHT nil-rate bands of £325,000, totalling £650,000 on Laura’s death. She has bequeathed the family home to Callum on her death, which is now worth £500,000. Accordingly, Laura’s RNRB of £175,000 will also be available, making the total nil-rate bands claimable by the estate of £1m. This covers the £975,000 value of her estate; hence no IHT is payable.
There is a tapered withdrawal of the RNRB for estates with a net value of more than £2m, see www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46023. The maximum RNRB of £175,000 will be reduced by £1 for every £2 that the value of the estate exceeds £2m.
Example 3: ‘Tapered’ RNRB
Sandra, a single parent, died on 1 September 2022 and left her home worth £900,000 to her daughter. Her total estate, including the above property, is worth £2.2m.
The RNRB will be reduced by £100,000, producing a net RNRB figure available of £75,000.
In some circumstances, the RNRB will still be available if an individual has downsized on or after 8 July 2015 and has either:
- replaced the property with a family home of a lesser value; or
-
has not replaced it but holds assets of an equivalent value in their estate, which the deceased has bequeathed to their children.
Practical tip
The RNRB is an important IHT exemption for estates following the death of an individual with lineal descendants. In many cases, considered tax planning will be required during the lifetime of the taxpayer to ensure that it will be both available and maximised for the deceased’s estate.
