Understanding the Residence Nil Rate Band: tips and traps

Posted on: November 13th, 2019

Understanding the Residence Nil Rate Band: tips and traps

What is the Residence Nil Rate Band?

The Residence Nil Rate Band (RNRB) is a useful tool for individuals seeking to minimise their estate’s inheritance tax liability, yet many are unaware of how to use it or even its existence. Having been brought into force in April 2017 it allows for an additional relief to be claimed, in much the same way as the ordinary nil rate band, provided certain conditions are met. The current value for 2019/20 is £150,000 rising to £175,000 from 1st April 2020. The amount applies for each person, so a married couple or civil partners can benefit from double the relief.

What are the conditions?

There are two conditions that need to be met to enable the relief to be claimed. Firstly, the property being left must be a qualifying residential interest (QRI). That means that the deceased must have owned or partly owned a property that they resided in at some point during their lifetime.

Secondly, the property needs to be “closely inherited”. In simple terms the property must be passed to direct descendants. Children, grandchildren and, interestingly, step-children will qualify, whilst nephews, nieces and siblings will not. It is important to note that unmarried partners will not benefit as they are not related to one another.

If either of these criteria are not met, then the RNRB cannot be claimed.

Can it be lost?

Yes, if the two above criteria cannot be met. It can also be lost in part if the estate is worth over £2 million due to tapering, and completely if it’s over £2.35 million. Consideration should be given, subject to professional advice being taken, to making gifts in your lifetime to reduce the value of the estate below this threshold. A claim has to be made within two years of the deceased’s death.

Is it transferable?

Yes, in much the same way as the ordinary nil rate band. If the first spouse/civil partner to die does not make use of their RNRB, then their surviving spouse/civil partner’s estate may be able to make use of it on their death, which allows up to a further £175,000 to be claimed (provided their estate does not exceed £2 million).

The property does not necessarily need to be the family home, or even situated in the UK. It simply needs to be a property which the deceased person has owned or had a share in and lived in at some point during their lifetime. There must however, have been some degree of continuity – one could not easily argue that a holiday home visited once a year would be a residence.

Some practical considerations

It is also important to remember that any available RNRB that is claimed is set off against the entirety of the estate, not just the value of the residence. From a tax planning perspective, it may not be beneficial to leave a share of the marital home to children on the death of the first parent, as the surviving parent will be unable to make full use of the unused RNRB on their death. Protection against care home fees may also be a consideration in those circumstances.

A Deed of Variation could be used to vary the terms of the Will after death to ensure that the RNRB is available in accordance with s142 of the Inheritance Tax Act 1984. However, there is no guarantee that this will remain an option if there is a change of government.

The legislation also makes provision for people who downsize before their death, or sell to move into residential care. If you downsize to a less valuable property, or sell your home, the RNRB can still be available provided the criteria for the RNRB can still be met (i.e. that it must be a QRI and left to lineal descendants).

There are also some timeline criteria to be aware of. The downsizing must have occurred on or after 8 July 2015 and the deceased must have died after 6 April 2017. It is also worth noting that the value of the relief is up to the limit depending on the value of the property interest.

If the first spouse/civil partner died prior to 6 April 2017 then the surviving spouse/civil partner will be able to claim the deceased person’s unused RNRB (as it would have been impossible for them to have used it). The deceased does not need to have owned a property.

If the property is left to a Discretionary Trust under the terms of the deceased’s Will, a claim for the RNRB cannot be made because it is not “closely inherited”. However, it is possible for an appointment out of the Trust to be made within two years of death to a lineal descendant, hereby enabling a claim to be made.

For more information on the RNRB, please contact a member of our Wills, Trusts & Probate team or fill in the enquiry form.