Tax 

Getting to grips with the residence nil rate band

  • List the key definitions, dates and thresholds for the residence nil-rate band.
  • Identify what are the 'traps' to watch out for in estate planning strategies.
  • Describe the common scenarios advisers may encounter with their clients when dealing with RNRB.
CPD
Approx.30min
Getting to grips with the residence nil rate band

The residence nil rate band (RNRB) can be a complicated topic.

Nonetheless, making the most of this allowance could save a client’s estate hundreds of thousands in inheritance tax. So it is worth being familiar with it. 

What is the RNRB?

The RNRB came into effect on April 6 2017. For deaths that occur after that date, estates can now claim RNRB on top of the existing £325,000 nil-rate band.

The RNRB started at £100,000 per person. It is set to increase annually by £25,000 every April until 2020, when it reaches £175,000. After that it will increase every year in line with inflation, measured by the Consumer Price Index. 

The table below shows the maximum RNRB per person available depending on when a client passes away.

DateMaximum available RNRB (per person)
Between 6 April 2017 and 5 April 2018£100,000
Between 6 April 2018 and 5 April 2019£125,000
Between 6 April 2019 and 5 April 2020£150,000
Between 6 April 2020 and 5 April 2021£175,000
After 5 April 2021Rises in line with Consumer Price Index

So much for the basics. But as you’re no doubt aware, whether a client's estate will benefit from the RNRB can be a little more complicated.

They have to have what’s called a ‘Qualifying Residential Interest’. They have to pass their property to a direct descendant. And the amount of RNRB available is reduced the more the deceased’s net estate exceeds the £2m ‘taper threshold’.

Let’s look at what these conditions mean in more detail.

What is a Qualifying Residential Interest (QRI)?

The RNRB will only be available to individuals or couples who have a QRI. This means ownership of a residential property that has been the deceased’s home at some point.

Note that the property does not have to have been their main residence at the time they pass away. So while a buy-to-let property would not qualify, a property that was once the deceased’s home and was later let to tenants would.

Where the deceased owns more than one property, the executors must elect the property they wish to be treated as the QRI. The maximum amount of RNRB relief the estate can claim is limited to the value of the home.

Who counts as a ‘direct descendant’?

To claim the RNRB, the residence must be ‘closely inherited’. That means it must be left either by will, intestacy or survivorship to a ‘direct descendant’.

The following beneficiaries would qualify as direct descendants:

  • The deceased’s children (which could include adopted, fostered or stepchildren) and grandchildren.
  • The spouses of those children or grandchildren.
  • The widows, widowers or surviving civil partners of those children or grandchildren if not remarried at the date of death of the property owner.

How does the £2m ‘taper threshold’ work?

The RNRB is intended to help ‘middle England’ and those who aren’t especially wealthy. Because of this, it comes with a ‘tapering restriction’.

The amount of RNRB available is reduced by £1 for every £2 by which the deceased’s net estate exceeds the ‘taper threshold’ of £2m.

RNRB bear traps to watch out for

Because the RNRB is still very new, it is possible to overlook how traditional estate planning strategies can inadvertently reduce the amount of relief available to an estate.

Here are four potential ‘bear traps’ to watch out for.

Bear trap #1: Making gifts during the homeowner’s life

CPD
Approx.30min
  1. The RNRB is set to increase annually by how much every April until 2020?

  2. The RNRB will only be available to individuals or couples who have a QRI. This means ownership of a residential property that has been the deceased's home when?

  3. Where the deceased owns more than one property, the executors must elect the property they wish to be treated as the QRI. Is this true or false?

  4. According to the author, the RNRB is intended to help which group of people?

  5. Which one of the following is not one of the 'bear traps' for advisers to look out for?

  6. What is the key date to be aware of, according to the author, because downsizing rules only apply to clients who sold a property after that date?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • List the key definitions, dates and thresholds for the residence nil-rate band.
  • Identify what are the 'traps' to watch out for in estate planning strategies.
  • Describe the common scenarios advisers may encounter with their clients when dealing with RNRB.

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