What is the Residence NRB and why is it important?
It is always a positive move when making arrangements ahead of time. This can be especially true when preparing our Wills before we die.
At this point, you will most likely want loved ones to inherit the maximum value of your assets. No one wants a substantial cut of their estate to go to the taxman, but unfortunately, that is what happens if you are liable for Inheritance Tax.
Needless to say, we must all pay the taxes we are legally obliged to. Fortunately, however, there are several completely legitimate ways to reduce the burden of Inheritance Tax. The most recent to be introduced is the Residence Nil-Rate Band (RNRB), which is in addition to the standard Nil-Rate Band (NRB).
- The Residence Nil-Rate Band (RNRB) is an additional threshold for Inheritance Tax, specifically for your main residence passed on to direct descendants.
- For the tax year 2023-2024, the RNRB is set at £175,000 per person, allowing a couple to potentially pass on a property worth up to £1,000,000 tax-free.
- The RNRB is tapered away for estates worth more than £2 million, reducing by £1 for every £2 over the £2 million threshold.
- Any unused RNRB can be transferred to a surviving spouse or civil partner.
- Professional advice may be beneficial for less straightforward situations or to ensure an estate qualifies for the RNRB.
What is Inheritance Tax and Nil-Rate Band (NRB)?
Inheritance Tax is a tax levied on all estates worth more than a limit (the NRB) when they pass to the assigned heirs, after the testator’s death. The current NRB level is £325,000, and this amount is tax-free.
Any excess amount is taxed at 40%, although this is reduced to 36% if at least 10% of the net estate is left to charity. However, there are ways of increasing the tax-free allowance of an estate. For example, if the entire estate is left to your spouse or civil partner, the transfer is entirely tax-free. If the partner who dies first does not use all their NRB, therefore, it can be added to the allowance for the second partner.
What is the Residence NRB?
Beyond these arrangements, there are various means of reducing the Inheritance Tax burden, and the most recently introduced is the Residence Nil-Rate Band (RNRB), which came into force in 2017. This applies to estates that include a property that is part of the estate at the time of your death, but there are a number of restrictions on this.
The property must have been your home to qualify, although it does not have to be your home at the time of your death. This would, for example, include a property that has not been sold when you have gone into a care home.
In addition, to qualify for Residence NRB the property must be left, wholly or partly, to your direct descendants. However, if a qualifying property that was left in your Will has been sold, to downsize, some extra Residence NRB may still be claimed above the amount that is valid for the smaller home. This is called the downsizing addition. The sale must have taken place later than 8th July 2015, however.
The Residence NRB is paid up to either the net value of the property at the time of your death (taking into account liabilities such as any outstanding mortgage) or a maximum amount, whichever is lower. When it was introduced in 2017, the maximum was £100,000, but this has now risen to £175,000 and is planned to rise yearly in line with the Consumer Prices Index.
This means that combining the £325,000 of the Nil-Rate Band and the £175,000 of the Residence NRB, qualifying estates can now be passed on with £500,000 tax-free. However, this can be even higher. Like the basic Nil-Rate Band, the allowance can be passed on to the surviving spouse, making the total tax-free amount up to £1 million.
These arrangements, however, are only valid for estates worth below £2 million in total. If the total value of the estate is more, then a “tapering” comes into effect. This reduces the Residence NRB by £1 for every £2 the estate’s value exceeds £2 million.
The Residence NRB is a great opportunity to legitimately reduce the tax burden on your estate for your heirs. However, there are several points to bear in mind:
Inheritance by direct descendants
As we have said, to qualify for the Residence NRB the property must be wholly or partly inherited by a direct descendant. However, it is not always obvious which precise relatives this does or does not apply to.
Direct descendants include not only your children, grandchildren, great-grandchildren etc. but also any stepchildren, adopted children or long-term foster children you may have. The definition is extended to a spouse or civil partner to any of these, but it would not, for example, include your siblings, nieces, or nephews.
In some cases, the Residence NRB can be claimed if the property is put in Trust under your Will, but this does not apply to all types of Trust. For example, if the property is put into a Discretionary Trust, it will not be eligible unless the trustees make an appointment to the lineal descendants within two years following the death.
Another common trust arrangement is a life interest trust, where a partner or family member is allowed to live in the property for their life, then the property goes to their lineal descendants. This type of trust may not allow the executors to claim the RNRB, so it’s important to seek advice before deciding whether to set up such a trust.
The £2 million taper threshold
Since the Residence NRB was designed to help the moderately well off, rather than the rich, a cut-off point has been put in place of £2 million for the estate’s total value. Above that, as indicated above, a reduction of £1 in the allowance is implemented for every £2 the estate’s value exceeds this figure, until the allowance’s value reaches zero.
The estate’s total value is calculated after liabilities have been subtracted, but before reliefs or exemptions such as agricultural or business relief have been implemented. While shares are exempt from Inheritance Tax, they are included as part of the estate for this precise purpose.
There are ways of arranging your affairs to keep the estate value at below £2 million. However, these measures may also have other, unpredicted effects, so it is recommended to take professional advice before attempting to implement them.
What qualifies as a residence?
To qualify for Residence NRB, you need to have lived in a property at some point, even if you are not living there at the time of your death. However, only one property can be claimed for. This means that if, for example, you leave both a main home and a holiday home to your direct descendants, only one will qualify for Residence NRB. There is no reason, though, why a holiday home cannot qualify, even if it is outside the UK, as long as you have lived there at some stage.
If you own a buy-to-let property you have never lived in, however, this will not qualify. On the other hand, a former home that is being rented out at the time of your death does qualify, if the Residence NRB is not being claimed on another property.
Seek professional advice
The Residence NRB can potentially make a substantial difference to the proportion of your estate that your heirs will receive after your death. However, the rules about whether or not a property qualifies can be complex, and attempting to claim without seeking professional advice could result in a lost opportunity.
Whether you are looking at how to arrange your affairs to make the most of the Residence NRB, or whether you are an heir wondering whether you can claim it, speak to our expert Probate team to find out what your options are.
Nil-Rate Band & Residence NRB FAQs
What is the meaning of NRB (Nil-Rate Band)?
The Nil-Rate Band is the threshold for Inheritance Tax. Currently, it is set at £325,000 per person. Any estate valued over this amount is subject to Inheritance Tax.
What is the Residence Nil-Rate Band (RNRB)?
The RNRB is an additional threshold for Inheritance Tax, specifically for your main residence passed on to direct descendants. For the tax year 2023-2024, the RNRB is set at £200,000 per person.
Who qualifies as direct descendants for the RNRB?
Direct descendants include children, grandchildren, stepchildren, adopted children, foster children, or children for whom the deceased was appointed as a guardian or special guardian when the child was under 18.
What happens if my estate is worth more than £2 million?
The RNRB is tapered away for estates worth more than £2 million. It reduces by £1 for every £2 that the estate is worth more than the £2 million taper threshold.
Can any unused RNRB be transferred?
Yes, any unused RNRB can be transferred to a surviving spouse or civil partner. This is the case even if the first of the couple died before the RNRB was introduced.
Should I seek professional advice about the RNRB?
In some less straightforward situations, you may want to get professional advice about how to work out the RNRB, the effect of the RNRB on the Inheritance Tax liability, and what action you need to take to make sure that an estate qualifies for the RNRB.