The inheritance tax residence nil rate band
The inheritance tax residence nil rate band: your questions answered
We look at what you need to know about the inheritance tax residence nil rate band (RNRB) and how you can increase your entitlement.
Inheritance tax saving
In this tax year (2020/21) if you comply with the necessary requirements, the RNRB will save an individual up to £70,000 of inheritance tax and a married couple (or a couple in a civil partnership) up to £140,000.
To achieve this saving, on your death you must leave a residential property that you have occupied at some point to your “lineal descendants”. Lineal descendants are your children and grandchildren, their spouses and civil partners and include adopted, foster and stepchildren. The RNRB is transferable between married couples, so if the allowance is not used on the first death (perhaps because the family home is left to the surviving spouse) the executors of the second spouse to die can claim a double allowance.
What if I sell my house and move into care?
The RNRB should still be available if you sell your house and move into care. The downsizing provisions mean that if you have sold your house since 8 July 2015, or do so in the future, and you leave other assets instead of your house to your lineal descendants in your Will, the RNRB can still be claimed
It is also available if you give your house away, as long as you leave sufficient other assets to your descendants in your Will. If you move to a smaller property you should be able to claim the same amount of RNRB that you would have been entitled to had you retained the more valuable property. However, the RNRB is not deductible against a failed lifetime gift that has become subject to inheritance tax.
You should ensure that you retain the paperwork in relation to the sale and it may be helpful to deposit a copy of the completion statement with your Will.
Can larger estates benefit from RNRB?
If your estate is above £2 million then the allowance will taper away by £1 for every £2 in excess of £2 million. It’s important to note that the £2 million threshold is calculated taking into account all the assets in your estate not just those liable to inheritance tax. Individuals who own valuable business or agricultural property could find in many cases that they cannot claim the allowance. In those circumstances, a well drafted Will and appropriate estate planning can help to maximise the amount to which you would be entitled.
Can unmarried couples benefit from RNRB?
The RNRB can be claimed by each person in an unmarried couple. However, if the family home is left to the survivor of the couple it cannot be claimed on the first death and the unused allowance cannot be transferred to the surviving partner. This means that in those circumstances unmarried couples can claim only one allowance achieving a tax saving of half that of couples who are married or in a civil partnership. This can be overcome by making a Will leaving a sufficient share of the family home to trusts for the children on the first death so ensuring that an allowance can be claimed on each death.
My career has taken me all over the world and I have never owned a property. Will I be entitled to the allowance?
In order to qualify for the allowance your estate must contain at some point an interest in a dwelling house which you have occupied, so individuals who have never owned a property will not qualify. If you have owned a property, which you have not occupied because you have lived in job-related accommodation (a term which is defined by statute), then you would be able to claim the allowance if you had intended to occupy the property, subject to satisfying all the conditions.
I have a flat in London and a house in the country both of which I own and occupy. Can I claim the allowance on both properties?
No, the allowance is limited to one property only, although your personal representatives can decide to which property it should apply.
I do not have children but do own a property. Can I claim the allowance?
The interest in the house must be “closely inherited” which means that it must be inherited by lineal descendants (children, grandchildren etc including stepchildren and adopted and foster children). If you do not have children falling within the definition you will not be entitled to the allowance.
Our Wills leave our estate to our children on interest in possession trusts with the capital passing to our grandchildren. Does this fall within the definition of closely inherited?
Yes it does, but if your estate had been left on discretionary trusts (even if the only beneficiaries are your children and grandchildren) then this does not amount to being closely inherited and the allowance will not be available unless certain action is taken after your death. You should take professional advice on this point.
On the first death we leave our entire estates, which are worth less than £2 million, to each other and then to our children on the second death. Do we need to change our Wills?
As the allowance will not be used on the first death it can be transferred to the surviving spouse. Two allowances can then be claimed on the second death if the survivor has an interest in a dwelling house in their estate or is entitled to the downsizing allowance. No change is needed to your Wills for this reason.
We have a holiday home which we are thinking of giving to our children. If we fail to survive the gift by seven years could our personal representatives claim the allowance against this gift?
No, as the interest will not be closely inherited. Oddly if you had made a gift to which the IHT reservation of benefit rules applied (perhaps you continue to use the holiday home without paying a full market rental to your children) then the property would be closely inherited and the allowance could be claimed. However, the gift would be ineffective for IHT saving purposes irrespective of how long you survived it.
Our joint estates stand at just over £2.7 million. Is it worth reviewing our Wills or considering other IHT planning?
The short answer to this is “Yes”. The new allowance is worth £140,000 for a couple and a combination of careful Will drafting and lifetime gifts, which in themselves could reduce your overall IHT liability, could enable you to qualify for the allowance.
Do I have to change my Will to benefit?
That depends on the terms of your Will. In most cases the likely answer is that you will not need to change your Will but if you are in any doubt, you should review your Will.
If you would like to draft a Will or review your existing Will to make the most of your inheritance tax residence nil rate band entitlement, please get in touch for a free initial consultation.