Inheritance tax and the Residence Nil Rate Band

Posted on: July 11th, 2017

In April this year new changes came into effect that help home owners pass their home onto children and other family members tax free. However, there are some important things to keep in mind, says Sarah Roberts.

The Residence Nil Rate Band (RNRB), sometimes called the ‘family home allowance’, allows home owners to pass the family home directly to descendants, including grandchildren and stepchildren, with considerable tax savings.  It is being phased in over the next four years, starting this year at £100,000 and increasing to £175,000 by 2020.  The tax relief can be claimed by individuals, meaning that it is doubled for married couples.

It is a valuable tax relief on the family home and is particularly welcome when used alongside inheritance tax thresholds. RNRB is applied to the value of the property in which you live or have lived in at some stage, with the inheritance threshold then applying to the remaining estate.

The way it works is perhaps best illustrated with an example. Mrs A dies and leaves an estate consisting of a property worth £350,000 and savings of £50,000 – a total estate of £400,000. RNRB of £100,000 is deducted first, leaving £300,000 which is comfortably inside the inheritance tax threshold (currently £325,000), so there would be no inheritance tax to pay. However, if Mrs A’s assets were the other way round – a property worth £50,000 and savings worth £350,000 – the situation would be different. In this case, only £50,000 of the RNRB could be used, leaving £350,000. With the inheritance tax threshold of £325,000, this would leave £25,000 subject to inheritance tax at 40%.

Eventually, for married couples, it will mean that property with a value of £1m could be left to children free of tax. Rather usefully, RNRB can be claimed by those homeowners that have downsized based on the value of their former and more valuable home. However, RNRB relief may be lost if you do not own your property when you die, or if your descendants do not inherit. This could mean that those who choose to pass on property via a trust will lose out. There are also restrictions if an estate exceeds £2m. The calculations are complex and expert guidance should be sought.