25 March 2019 | Comment | Article by Lianne Jones TEP

The residential nil rate band – what is it and when does it apply?

As we approach the start of the new tax year, I'd like to discuss the upcoming increase to the inheritance tax residential nil rate band.

Over the last decade or so there have been several key changes to inheritance tax legislation, one of the most significant being the introduction of an additional threshold. This is sometimes referred to as the “residential nil rate band” or “additional residential property allowance” (RNRB).

Announced by the Government in the Summer Budget 2015, the RNRB is being introduced in increments each tax year from 2017/2018 until 2020/2021. In order to fully understand the RNRB, it is necessary first to appreciate the basics of inheritance tax.

Nil rate band

Currently every person has an inheritance tax allowance of £325,000, widely referred to as the “nil rate band” or “inheritance tax threshold”.

In the event of your death, your executors will consider the assets in your estate and who benefits from them. Tax will be payable on the portion of your estate which exceeds £325,000 and to which no reliefs or exemptions apply. Usually, if your estate is less than £325,000 you do not need to worry about inheritance tax.

If you benefit your surviving spouse or civil partner, there is an exemption that means that any assets left to them do not attract inheritance tax and do not use up your nil rate band. Gifts to charity benefit from a similar exemption. Other reliefs are also available on certain assets (such as business or agricultural interests) in very specific circumstances.

Since 2007, any unused nil rate band of the first spouse to die can be used by their surviving spouse on their later death. In practice, it means that many married couples and those in a civil partnership can have an effective nil rate band of up to £650,000. If you or your spouse/civil partner have previously been widowed, you may have greater allowances available.

Residential nil rate band

The RNRB applies to estates where a residential property is passing to one or more of your direct descendants. This includes:

 

  • Children and step-children

 

 

  • Adopted children (inheriting from adoptive or biological parent)

 

 

  • Foster children

 

 

  • The spouses and descendants of the above

 

For deaths in the tax year 2018/2019, the RNRB is £125,000. In 2019/2020, which begins on 06 April 2019, the RNRB will be £150,000. The final increment, which will apply to deaths on or after 06 April 2020, will give a total RNRB of £175,000 per person.

Like the nil rate band, the RNRB is transferable between spouses. Even if the first spouse died before 06 April 2017, the survivor can still benefit from the transferable allowance provided that the surviving spouse died after that date.

Other considerations

What if I don’t own a property when I die?

The allowance may still be available to your estate if, when you died, you had previously owned and sold (after 8 July 2015) a residential property.

What if I own more than one property?

If you own more than one residential property, after your death your executors will be able to choose to which property to apply the allowance. You must have lived in the property in order to use the RNRB.

Does the value of my estate impact the allowance?

If the value of your estate at your death (deducting liabilities) is £2 million or more, your RNRB will be reduced by £1 for every £2 by which your estate exceeds £2 million.

The rules on inheritance tax are often complex, there are exceptions and intricacies that apply to the legislation discussed. If you'd like to speak to one of our experts to find out how these rules affect you, click here.

Business news, knowledge and insight