What is the Residence Nil Rate Band and how can it help with Inheritance Tax?
The Residence Nil Rate Band offers a significant amount of relief on inheritance tax; however, calculating eligibility can be complex.
Managing the estate of a loved one who has recently died can be a stressful task, especially when the sale of assets is involved. However, tax relief is available and planning for the impact of inheritance tax (IHT) now can go some way to easing the burden of settling an estate.
One of the most helpful forms of tax relief for this is the Residence Nil Rate Band (RNRB), which offers a tax exemption on a proportion of the value of a property. As property is likely to be the largest asset many people will own, we recommend that anyone undertaking estate planning should consider the RNRB.
What is the Residence Nil Rate Band?
Who is eligible for the RNRB?
Any UK taxpayer is eligible for the RNRB if their estate has included a home at some stage and this is left to a lineal descendant (e.g., children, grandchildren, great-grandchildren, adoptive, step or fostered children, or guardianships). In the case of a married couple or civil partnership, any remaining RNRB can be brought forward or transferred to the surviving spouse.
However, if the estate’s value exceeds £2,000,000 a tapering rule applies, which increases the tax rate in line with this value and can reduce the RNRB to zero in some cases.
How does tapering of the RNRB work?
Tapering of the RNRB applies for estates worth over £2,000,000, based on the value of your estate on death. When the estate’s value exceeds £2,000,000, the RNRB is reduced by £1 for every £2 of value.
For large estates, tapering can reduce the RNRB to zero. For example, if you are a married couple with an estate worth more than £2,700,000 you will have no RNRB as it will be tapered away.
Please note that tapering applies to your entire estate or ‘net estate’ and not just the value of your house. Importantly, tapering cannot be reduced through exemptions like spousal exemption or reliefs such as agricultural or business property relief. In some circumstances, planning options are available (especially if both spouses are still living).
How does inheriting the RNRB work?
If a married couple does not fully utilise the RNRB on the estate of the first to die, they can transfer the unused RNRB to the second estate. For example, if £25,000 remains after settling the estate of the first to die, their spouse can inherit this and have a total RNRB entitlement of £200,000 (the standard £175,000, plus the inherited £25,000).
It is not uncommon for a married couple to have unused NRB totalling £1,000,000 on the second death when combining the NRB and RNRB (2 x £325,000 plus 2 x £175,000), which means it is well worth considering the most tax-efficient way to make use of the RNRB. Please note, the unused RNRB must be claimed by the surviving spouse.
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How does the downsizing addition work?
The Government introduced the downsizing addition when they recognised that people who had downsized to less valuable properties in later life or had sold their home and moved into care, might lose some or all of their entitlement to RNRB.
The downsizing addition enables this lost benefit to be reinstated if other assets are closely inherited. What this means in practice is that an individual or couple can claim the amount of tax relief their estate would have been eligible for before downsizing. However, you must meet certain conditions to qualify for the downsizing provision:
- You must have given away or downsized to a less valuable home (on or after 8 July 2015)
- Your former home would have qualified for the RNRB if you had kept it until death
- Your direct descendants would need to inherit at least some of the estate
It is important to note that there is no automatic entitlement to the downsizing addition, and the deceased’s legal representative must claim this benefit within two years of the end of the month that the death occurs.
Managing RNRB on inheritance tax
While the Residence Nil Rate Band offers one of the most substantial forms of tax relief when managing an estate, the amount you can claim will vary based upon individual circumstances. We strongly recommend seeking advice if you have a large estate or have downsized from a more valuable property, especially as other forms of tax relief may apply to your situation. And remember, the current tax rates are only available until the end of the 2025/2026 tax year and are likely to change after that, so some clever estate planning now could make a big difference in the future.
For personalised advice around the most tax-efficient ways to manage your estate and plan for IHT, chat with a Wealth Planner.
* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.