Inheritance Tax – Residential Nil Rate Band

What is Inheritance tax?

Inheritance tax (IHT) is a tax on the estate of a person who has passed away. A person’s estate is made up of various assets; these can include property, money and possessions. Inheritance tax is payable when an estates value exceeds their Nil Rate Band or Inheritance tax allowance.

What is a Nil Rate Band?

The Nil Rate Band (NRB) is the maximum amount up to which there is no inheritance tax payable on an Estate. Everyone has their own Nil Rate Band which is used upon their death. A person’s individual Nil Rate band allowance is currently set at £325,000.

Although a person’s NRB is set, Inheritance tax is paid at a rate of 40% on the value of the estate that exceeds the inheritance tax allowance; a person’s Inheritance tax allowance can be increased. A persons allowance will never be lower than their Nil Rate Band of £325,000, but their Inheritance tax threshold can be increased through the use of additional Nil Rate Bands or exemptions. The amount that the inheritance tax threshold is increased by is dependent on what additional Nil Rate Bands the estate is eligible for, if any at all.

What is a residential Nil Rate Band?

The Main Residence Nil Rate Band (RNRB) is an additional allowance for property that can be combined with a person’s own £325,000 Nil Rate band to increase their Inheritance Tax Threshold.

The Residential Nil Rate band was introduced in April 2017 and allowed an additional £100,000 inheritance tax allowance to be used if an estate meets the qualifying conditions. As of April 2018 the allowance was increased and the current Residential Nil Rate Band is set at £125,000.

When can the RNRB be used?

An immediate indication of whether an estate is eligible for the additional RNRB is decided by who is inheriting the property. The RNRB can only be used when the property is being inherited by the deceased’s direct descendants (children, grandchildren) either via the Will, the rules of Intestacy or anther means of legal method.

However use of the RNRB and the amount that can be applied to an estate can quickly become very complicated and will vary from estate to estate.

Example of an estate that is not eligible for additional nil rate bands

Person A has an estate with the total value of £400,000.

Person A was not married or widowed (not eligible for a transferable Nil Rate Band) and has no children (not eligible for the residential Nil Rate Band).

Their £325,000 NRB would be used leaving a remainder of £75,000.

This £75,000 is liable for Inheritance tax which is charged at 40%.

40% of £75,000 is £30,000. Therefore Person A’s Estate will pay £30,000 to HMRC in inheritance tax.

Example of an estate that is eligible to use the Residential Nil Rate Band

Person B also has an estate with a total value of £400,000, consisting of a property worth £300,000 and Cash assets of £100,000.

Person B leaves their entire estate to Child 1, this qualifies them for use of the additional RNRB allowance.

The full RNRB of £125,000 is used (as the property’s value is more than the maximum RNRB amount the whole RNRB allowance can be used) leaving a remainder of £275,000. (Estate value of £400,000 – RNRB of £125,000 = £275,000).

Person B’s personal NRB of £325,000 is then used on the remaining £275,000 estate, as the remaining value of the estate is less than Person B’s Nil Rate Band there is no Inheritance tax to pay. There is, however, £50,000 of Person B’s NRB that is left unused, this unused allowance can be transferred to a spouse of civil partner to reduce or limit the inheritance tax liability on their estate.

Is a residence Nil Rate Band Transferable?

A person’s RNRB can only be transferred to a spouse or civil partner if there is an unused amount of allowance available.

If the deceased has left their entire estate including any property they owned to their spouse or civil partner, their RNRB would be unused and eligible to transfer to the surviving spouse/civil partner upon the second death. If some of the RNRB was used on the first death, as with the example above, only the remaining unused allowance would be transferable.

Example of transferable Residential Nil Rate Band

Spouse A leaves everything (including property) to Spouse B. Upon Spouse B’s death they leave their estate to Child 1.

Spouse B’s estate is entitled to use both their personal NRB of £325,000 and their RNRB of £125,000 (depending on the value of the property) giving them an inheritance tax free allowance of £450,000.

They are also entitled to use Spouse A’s NRB of £325,000 and RNRB of £125,000 (depending on the value of the property) which would be added to Spouse B’s Inheritance allowance increasing Spouse B’s maximum tax free threshold to £900,000.

How to apply for the residence Nil Rate Band?

An application to claim the RNRB is done using the IHT 435 “Claim for residence nil rate band (RNRB)” and is sent to the probate office along with the corresponding PA1 form and IHT forms.

In order to transfer another person’s unused RNRB an additional form, the IHT 436 “Claim to transfer any unused residence nil rate band (TRNRB)” must be completed and sent with the rest of the corresponding application.

 

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Inheritance Tax – Nil Rate Band and Transferable Nil Rate Band