The Residence Nil Rate Band (RNRB) is an additional inheritance tax allowance which can be utilised by those who have a residential property and wish to leave this to their direct descendants. This includes children, grandchildren, stepchildren and even widows, widowers and civil partners of descendants in certain circumstances.
On 6 April 2017, George Osborne announced “you can pass up to £1 million on to your children, free of inheritance tax. No more inheritance tax on family homes” by the introduction of the Residence Nil Rate Band for inheritance tax.
What does the RNRB mean for you, 2 years on from its introduction?
How the Residence Nil Rate Band could affect you this year
Unfortunately for those without any of the descendants listed above, the new allowance will be of no benefit.
The RNRB for this current tax year (2019/2020) is £150,000 and is scheduled to increase to £175,000 in the tax year 2020/2021. This is in addition to the ordinary Nil Rate Band of £325,000. In both cases, for married couples, there is the option to transfer any unused allowance from the estate of the first spouse to die to the estate of the second spouse to die. So, by 2020/2021 the combined allowances of a married couple could mean that £1 million of assets could pass free of inheritance tax.
It is important to note, however, that where a person’s estate exceeds £2 million then the availability of the additional allowance will be limited proportionately. Also, if someone has downsized their property since July 2015, their estate could potentially still benefit from the use of the Residence Nil Rate Band allowance. If certain criteria are met the RNRB allowance could apply against the value of assets in their estate.
How can you make sure to take advantage of the RNRB allowance?
The ability to pass up to £1 million of your estate Inheritance Tax-free – will be available in certain circumstances. However, establishing the position could be complicated and it is important that full advice is taken to maximize your potential benefit.
Incorporating Trusts into your Will can ensure flexibility to allow your executors to arrange your estate in the most tax-efficient way whilst still benefiting your intended family members. By passing assets from your estate to a Trust, in certain circumstances, this may lower the overall inheritance tax bill by:
- Ensuring that the assets in the estate of a surviving spouse do not exceed £2 million;
- Ensuring that the growth in the value of certain assets is kept outside of the estate of the surviving spouse;
- Making sure that the value of assets which may be eligible for other inheritance tax reliefs, such as Business Property Relief, are fully utilised.
If you already have existing Trusts in place which contain a share or interest in a residential property, we would recommend that these Trusts are reviewed to ensure that they are arranged in a way that makes full use of the Residence Nil Rate Band where necessary.