What is the Residence Nil Rate Band (RNRB)?

Note: The following article is part of our Complimentary Articles Series, designed to provide additional insights and detailed information on specific topics within estate planning.

In conjunction with the following article, we recommend you review the following pillar articles to understand inheritance taxes comprehensively.

What is Inheritance Tax (IHT)?

What is an Inheritance Tax Return?

How Do I Pay Inheritance Tax to HMRC?

When Does IHT Need to Be Paid?

What Taxes Should I Consider in Estate Planning?

INTRODUCTION

One of the more intricate aspects of estate planning relates to property transfer and Inheritance Tax (IHT).

Within IHT planning is the Residence Nil Rate Band (RNRB), which was designed to provide additional tax relief for families by offering an additional allowance to homeowners passing on their primary residence to their direct descendants (children or grandchildren).

Understanding the Nil Rate Band is crucial because, by leveraging this additional allowance, you can potentially increase your tax-free threshold, thereby protecting more of your Estate for your loved ones.

This article explains the Residence Nil Rate Band (RNRB), sheds light on the current allowances, and illustrates how it works with a few examples.

For context, we recommend reading related articles on Inheritance Tax planning.

KEY FEATURES OF THE RNRB

• Currently, the RNRB allows an additional allowance on top of the standard Nil Rate Band (NRB) of £325,000.

• Currently, the RNRB provides an additional £175,000 per person.

COMBINED THRESHOLD

When the RNRB is combined with the NRB, it increases the IHT threshold. Here's a breakdown of how it works:

• Individuals are eligible for a total IHT threshold of £500,000.

• Married couples or civil partners can combine their allowances, resulting in a significant £1,000,000 IHT threshold if they pass their primary residence to their direct descendants.

However, when making plans for the RNRB, one essential requirement must be considered.

To qualify for this extra relief, the property must be a part of the Estate at the time of death. Giving your house to your children while you are still alive renders the RNRB null and void. 

HOW THE RNRB WORKS

We've provided a number of examples to illustrate the RNRB under a few different scenarios:

Example 1: Maximising the RNRB For Large Families

• Mike and Shauna are a married couple with three children.

• They own a house in Sevenoaks worth £425,000.

• As they are married, they can transfer these allowances between themselves.

• Mike’s NRB = £325K + RNRB = £175K = £500k.

• Shauna’s NRB = £325K + RNRB = £175K = £500k.

• The combined NRB and RNRB allowances are £1m IHT tax-free threshold.

Example 2: Limited RNRB Due to Property Value

• John and Mary are a married couple with two children.

• Their house in Walsall is worth £150,000.

• As they are married, they can transfer these allowances between themselves.

• John’s NRB = £325K + RNRB = £75K = £400k.

• Mary’s NRB = £325K + RNRB = £75K = £400k.

• The combined NRB and RNRB allowances: £800,000 IHT tax-free threshold (limited by the property value).

Example 3: The Challenge Without Linear Descendants

• Steven and Robert have been together for decades but are unmarried and have no children.

• They jointly own property, including a Scotland property worth over £500,000.

• They cannot combine their estates (unless they get married or use a Trust) and cannot get the Residence Nil Rate Allowance due to the absence of linear descendants.

• Steven and Robert will need to pay IHT.

In each scenario, you can see what happens when the RNRB is applied based on factors like property value, marital status, and the presence of direct descendants.

Need to know more?

Given the tax intricacies associated with planning, we always recommend seeking comprehensive professional advice before proceeding with such a decision.

Squiggle is happy to discuss potential alternative estate planning strategies that might provide a more secure and efficient means of accomplishing your goals without putting you and your loved ones at needless risk.

In addition, in certain tax situations, we'd be pleased to connect you with one of our knowledgeable tax partners.

Book a callback, and we'd be happy to arrange a no-cost, no-obligation discussion with you to lay out the options available.

Alternatively, call us on 01233 659 796.

Or reach out to us here.