On 6 April 2020, the residence nil rate band increased to £175,000 per person, from £100,000 just three years ago. The residence nil rate band is an inheritance tax ("IHT") relief which applies to the value of your home, provided your estate (the assets and possessions that you own at death) meets certain conditions.
How it works: the basics
The full residence nil rate band (“RNRB”) can be claimed for anyone who meets the following conditions on death:
- they own their "main residence";
- their main residence will be inherited by their direct descendants (generally children or grandchildren, including stepchildren, adopted children and foster children); and
- their total estate on death before any IHT relief is applied is less than £2million.
Some potential pitfalls
The amount of RNRB available tapers by 50p for every £1 of the estate above £2million. This means that estates of £2.35million and over will not benefit from the RNRB at all. Estates between £2million and £2.35million are eligible for a reduced RNRB.
The RNRB is capped at the value of your share of your main residence at death. If that is worth less than £175,000, you will only get relief on the value of your share. However, if you downsize before death and move to a less valuable residence, you can still claim an additional RNRB allowance from the amount available on your old house.
Reaching £1m and what it means for you
However, £175,000 is well short of £1m, so how do we get to that magic figure?
Like the existing nil rate band ("NRB"), the RNRB is transferable. This means that one spouse's or civil partner's unused RNRB can be transferred to the survivor on their death. As many married couples will leave everything to each other on the first death, this can potentially double the NRB and RNRB available to the survivor.
If a married couple leave everything to each other on the first death and can claim the full RNRB on the second death, their estate will be entitled to a £1million IHT allowance. This is comprised of a NRB of £325,000, a transferable NRB of £325,000, a RNRB of £175,000, and a transferable RNRB of £175,000. From next year, the RNRB will continue to increase annually in line with inflation, according to the Consumer Prices Index.
Next steps
Making sure your affairs are structured in a way which means you qualify for all of these reliefs can significantly reduce the amount of IHT paid, meaning more of your estate will pass down to your children and grandchildren.
Estate planning is complicated, and you should discuss your circumstances with specialist advisors to ensure your will is drafted to take advantage of these allowances.
Please contact a member of our team for more information and to discuss how we can help you.
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