The estate of an individual who
dies on or after 6 April 2017 may qualify for an increased tax-free
amount, the residence nil-rate band (RNRB), if their estate
includes an interest in a home which is being left to their direct
descendants. This is in addition to the existing nil rate band
(NRB) of £325,000 for inheritance tax (IHT). We have already
been told that the NRB will be frozen at this amount until 2021.
IHT is taxed at a rate of 40%, however tax will only be payable on
the value of the estate which exceeds the overall tax free amount
(the RNRB and NRB). We address some basic questions regarding the
How much is the RNRB?
The RNRB will be phased in over the
next 4 tax years and the maximum amounts for the RNRB are as
£100,000 for 2017/18
£125,000 for 2018/19
£150,000 for 2019/20
£175,000 for 2020/21
From 2020/21 the RNRB will increase
in line with the Consumer Prices Index (CPI). The RNRB for an
estate will be the lower of the maximum amount of
the band (as above) OR the net value of the interest in residential
property (after deducting any liabilities such as mortgage).
This means that in 2021 a maximum
tax free amount of £500,000 per individual will be
Will my estate qualify for the RNRB?
The conditions for RNRB to apply to
your estate are that when you die you must have an interest in a
residential property which:
1. is part of
2. has been your
'closely inherited' (i.e. left to one or more direct
For the purposes of the RNRB,
'direct descendants' includes stepchildren, adopted
children and foster children. In addition, the spouse, civil
partner, widow or widower of a direct descendant may also
The RNRB applies whether the
property is inherited under the deceased's Will, on intestacy
or the property passes to a co-owner by survivorship.
Does it apply to estates of all sizes?
If the net value of the estate
(after deducting liabilities but before reliefs and exemptions) is
above £2m, the RNRB is tapered away by £1 for every
£2 by which the net value exceeds that amount. Therefore, in
practice this means that estates equal to, or exceeding the below
net values will not benefit from the RNRB:
£2,200,000 for 2017/18;
£2,250,000 for 2018/19;
£2,300,000 for 2019/20; and
£2,350,000 for 2020/21.
What if I leave my estate to my spouse or civil partner?
Many people leave their estates to
their spouses, should they survive them, and therefore their entire
estates will benefit from the spouse exemption and no IHT will be
payable as the charge is deferred until second death.
However, as with the NRB, the RNRB
will not be lost. Should the full RNRB or even a percentage
of it have been unused to reduce the estate of the first to die,
then it will be possible to transfer the RNRB so that it can be
applied to the estate of the surviving spouse on his/her death.
However, tapering provisions do apply to the estate of the first
spouse to die, if its value exceeds the thresholds stated
What if I sell my property before I die?
The RNRB provisions include a
downsizing relief which can be claimed where the deceased downsized
to a less valuable residence or ceased to own a residence on or
after 8th July 2015 as long as the smaller residence or assets of
equivalent value are left to direct descendants.
It is fair to say that the scope of
the RNRB is more limited than had originally been anticipated and
the conditions that must be satisfied in order for it to apply are
complex. However if you believe your estate may qualify for the
RNRB, or more particularly if it just exceeds or is likely to
exceed the threshold, then you should review your Will and
succession planning carefully and seek advice to ensure that your
estate benefits from the RNRB wherever possible. There are steps
that can be taken to maximise the likelihood of qualifying for the
RNRB and we can advise you about these.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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