Residence Nil Rate Band: When Is A ‘Residence’ Inherited And What Constitutes ‘Closely Inherited’?

Malcolm Finney takes a look at two important terms in the inheritance tax residence nil rate band rules.

For deaths occurring on or after 6 April 2017, an extra nil rate band is available to reduce the inheritance tax (IHT) charge on the deceased’s estate. This extra nil rate band is referred to as the residence nil rate band (RNRB). The RNRB is in addition to the ordinary nil rate band (NRB).

The NRB is £325,000 (for 2018/19), whereas the RNRB is much less and varies in amount depending upon the tax year of death. Thus, for the tax years 2017/18, 2018/19, 2019/20 and 2020/21, the amounts are £100,000, £125,000, £150,000 and £175,000 respectively.

Both the RNRB and NRB are capable of transference (if unused) to a surviving spouse.

For an estate to qualify for the RNRB requires that, on death, a ‘residence’ of the deceased is ‘inherited’ by his children or other descendants. This automatically means that those with no children or those who do not own a residence (unless downsizing has occurred) cannot take advantage of the RNRB.

Technically speaking, the deceased at the date of death must have owned a qualifying residential interest; in short, a beneficial interest in a property in which living is capable. The residence doesn’t need to have been lived in at the date of death nor must it have been lived in throughout the whole period of ownership.

Where two or more residences are owned at death, the executors may elect which is to be used for RNRB purposes (usually the most valuable).

If the value of the deceased’s estate at death exceeds £2 million, the relevant amount of RNRB is itself reduced by £1 for every £2 that the estate exceeds £2 million. Hence, the RNRB would be reduced to nil if in the tax year 2018/19 an estate was worth £2,250,000 (and assuming no transfer of any part of the RNRB).

The relevant residence needs to be ‘closely inherited’ by which is meant inherited by one or more of the deceased’s lineal descendants (i.e. children/grandchildren, etc). Children, for this purpose, includes step children, adopted children, and foster children.

‘Inherited’ requires inheritance under a will, by the right of survivorship (e.g. a residence owned by beneficial joint tenants) or on an intestacy. In addition, the inheritance must be outright and generally not left on trust (although if the trust under the will is, for example, an ‘immediate post-death interest’ trust for a lineal descendant, RNRB would be available). 

It should, therefore, be appreciated that where (for example) a husband and wife own their residence say 50:50 as beneficial joint tenants (as is very common), on the death of one spouse the surviving spouse automatically inherits. As a consequence, no RNRB would be available as the inheriting surviving spouse is not, of course, a lineal descendant of the deceased spouse. It may in such cases be worth considering whether ownership should be changed to tenants in common so that on the first death, a 50% interest may be left to the children.

As with the NRB, any unused part of the RNRB can be transferred to the surviving spouse and thus may not be lost.

John and Mary are married with two children.

John dies and leaves the whole of his £500,000 estate to Mary. Mary subsequently dies in 2018/19 and leaves her estate equally to the two children. Mary’s estate included a residence worth £450,000 at the date of her death.

On John’s death, neither his RNRB nor his NRB was utilised. Thus, on Mary’s death, her RNRB and NRB are each increased by 100% to £250,000 and £650,000 respectively.

In the above example, John and Mary would need to have ensured that the whole of Mary’s £900,000 could be used tax-efficiently; if not, it may have been advisable for John to have used some or all of his RNRB and NRB.

The RNRB figures quoted above at the beginning of the article are maxima. If a married couple with children owns a residence worth, say, £200,000 and both die in 2018/19, their aggregate RNRB will not be £250,000 but would be restricted to £200,000 (assuming no downsizing). 

It is quite common for people to downsize as they get older to a less valuable property, often once the children have left home.

This does not mean that there will necessarily be any loss of the RNRB for each spouse, as the legislation makes provision for downsizing, although it is quite complicated; advice would generally be needed.

Check wills and how any residence is owned and then make sure any possible RNRBs are not wasted.