The Residence Nil Rate Band (RNRB) comes into force for deaths on or after today, 6 April 2017. Much has been written about this new inheritance tax (IHT) allowance since it was introduced in the summer Budget of 2015. However, due to its technical nature, there is still much uncertainty surrounding its application in practice. This blog is the first in a series of three regarding the RNRB and provides an introductory summary (if there is such a thing) of the key points of the RNRB.

1. The RNRB will be phased in over four years

The RNRB will be available for deaths on or after 6 April 2017. The allowance will be phased in over four years. For deaths in tax year 2017/18, the maximum allowance will be £100,000, rising to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. Thereafter, the RNRB will increase in line with the Consumer Price Index.

2. The RNRB applies in addition to the existing Nil Rate Band (NRB)

The RNRB applies in addition to the existing IHT Nil Rate Band (NRB), which has been frozen at £325,000 until 6 April 2021. In short, if the deceased satisfies the RNRB conditions (more on these below), by 2020/21 they could benefit from the RNRB of £175,000 in addition to the NRB of £325,000 and IHT would only be charged above this combined amount. Notably, the RNRB reduces the IHT chargeable against the deceased's entire estate, and not just their main residence.

3. The RNRB only applies if your estate includes a "qualifying residential interest"

The RNRB only applies to a "qualifying residential interest". Broadly, the RNRB will apply to a property that has been the deceased's residence "at some point". There is no requirement for the property to have constituted the deceased's main residence and if the deceased owned more than one property, their executors can nominate which property should be covered by the RNRB (see below if the deceased disposed of the residence before death).

4. The "qualifying residential interest" must be "closely inherited"

To qualify for the RNRB, the property must be "closely inherited". That is, the property must pass to the deceased's "lineal descendants" on death. A "lineal descendant" includes a child, grandchild or remoter descendant, and their spouses and civil partners are also included in some circumstances. The RNRB also applies where the property is left to foster children, adopted children, step-children and children for whom the deceased was a guardian (or descendants of any of these individuals). The property is "inherited" when it passes under the provisions of a will, intestacy (if there is no will) or by way of a survivorship destination in the title deeds (the ownership documents for the property).

5. If you leave your property to your children in trust, the RNRB may not apply

The legislation refers to a property being left outright to descendants. However, it is not uncommon for parents to leave assets to their child, grandchild etc. in a trust structure until that individual has reached a certain age. In these circumstances, the RNRB will only be available where the property passes to the following types of trust on death:
  • an 'immediate post-death interest' or 'liferent' trust, where the 'lineal descendant' has an interest in possession in the property;
  • a 'bare trust';
  • an '18 - 25 trust';
  • a trust for a bereaved minor; or
  • a disabled person's trust.
Discretionary trusts, however, are excluded.

6. The RNRB can be transferred between spouses and civil partners

Like the NRB, the unused percentage of the RNRB on the first death can be transferred to the estate of the surviving spouse or civil partner for use on their death, irrespective of when the first death occurred or whether the second to die owned residential property at their death. If the first death occurred before 6 April 2017, the transferable RNRB is taken to be £100,000, so that the RNRB is always transferable in full even if the property did not pass to a lineal descendant on the first death.

7. You do not need to actually own a residence to benefit from the RNRB

Although the name of the allowance may suggest that ownership of property at the date of death is a prerequisite to qualify for the allowance, this is not necessarily the case. If the deceased formerly owned a property which they disposed of during their lifetime there may be a downsizing addition available on death. The 'downsizing' provisions, as they are commonly known, are not straightforward and will be covered in more detail in a separate blog.

8. The RNRB may not apply in full (or at all) if your estate is over £2 million

The RNRB will be reduced by £1 for each £2 by which the estate is over £2 million. "Estate" is defined as "the value of a person's estate immediately before the person's death", i.e. after deduction of debts outstanding at death, but ignoring the benefit of agricultural property relief, business property relief or exempt transfers such as transfers to the surviving spouse or civil partner. The taper range is fairly narrow - in the first year it is between £2 million and £2.2 million. This means that with a maximum RNRB of £100,000 in 2017-18 the RNRB will be unavailable if the estate is worth £2.2 million or more.

9. Lifetime gifts are ignored when calculating the value of the deceased's estate

Following on from point 8, if the deceased made any gifts in the seven-year period before death, these are ignored entirely when calculating the value of the estate for the purposes of the RNRB. Therefore, even if the deceased made a lifetime gift of £1 million one day before death, which reduced the value of their estate at death to £1,999,999 the RNRB will still apply (provided the relevant conditions are satisfied), although there would be other IHT (and other tax) implications here.

10. It's not straightforward

As is often the case with legislation intended to "simplify" the existing position, the RNRB arguably achieves the polar opposite. The legislation dealing with the RNRB is voluminous and complex, meaning that the need for professional advice at an early stage is especially important. Any change in the law should always prompt those with and without wills to review their affairs, but that is particularly the case when there is the possibility of an IHT saving of as much as £140,000.