A Guide to the new ‘Residence Nil-Rate Band’ (RNRB)
To understand how the new RNRB works, it’s helpful to start with a quick summary of the position before the RNRB came in. This is the basic ‘Nil Rate Band’.
The basic Nil Rate Band (NRB)
The basic NRB is the threshold at which point inheritance tax becomes payable on death. Each estate has its own NRB which is currently set at £325,000. The value of the deceased’s estate that falls within the current nil rate band is taxed at 0%. Any amount that exceeds £325,000 is taxed at 40%. For married couples or those in a civil partnership, the unused portion of the first deceased spouse’s nil rate band can be transferred to the surviving spouse (giving £650,000 at 0% tax on the second death). The current NRB of £325,000 is frozen until the end of 2020 to 2021.
The new ‘RNRB’
With the RNRB, the government has introduced an additional way for people to reduce the burden of inheritance tax on their estates where they pass their main residence, through their wills (or intestacy), to their direct descendants. The objective is to make it easier for families to pass on the family home to direct descendants with a reduced tax charge. For some, this is a welcome change given the current market value of residential property, particularly in London and the South East.
The RNRB came into effect on 6 April 2017 and only applies to reduce the tax payable by an estate on death.
The RNRB is not applicable to reduce the tax payable on lifetime transfers that are chargeable as a result of a later death such as transfers into trusts or gifts made within seven years of death. Similarly to the current NRB, the RNRB will be transferable between spouses.
How does it work?
If someone dies on or after 6 April 2017 and their estate exceeds the current NRB of £325,000, their estates may be eligible to receive the RNRB, which is due to incrementally increase over the next five years as follows.
For the year financial year 2017 to 2018, the RNRB is up to £100,000.
The maximum amount will then go up yearly. The RNRB will increase in the following years:
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
For the later years, the threshold will increase accordingly with inflation based on the Consumer Prices Index.
Mr Smith dies on 1 September 2017 and leaves a home and assets worth £400,000. The tax payable is calculated as follows: –
1) Subtract the NRB (£325,000) = £75,000
2) Subtract the RNRB for 2017 (£100,000) = -£25,000
The whole of Mr Smith’s estate can be taxed at 0% for inheritance tax purposes because the value of his estate falls within the combined NRB and RNRB. The remaining £25,000 is unused and can be transferred to his surviving spouse.
Please note, there are certain eligibility rules which will need to be taken into consideration by the personal representatives of an estate to determine whether the estate is in fact eligible for the RNRB. You can find further information about eligibility on the HMRC website.
If you require any further advice or information about the application of the RNRB please contact Natasha Hejabizadeha and Sarena Spicer.