What is the residence nil rate band?

Understanding the Residence Nil Rate Band (RNRB)

The Residence Nil Rate Band (RNRB) is a tax allowance that applies to inheritance tax in the UK. Introduced in April 2017, it was designed to help individuals pass on the family home to direct descendants. This allowance comes in addition to the standard Inheritance Tax nil rate band.

Its introduction aimed to provide relief to families, making it easier to retain property wealth across generations. For many, this means less of their estate may be subject to the standard 40% inheritance tax rate.

How the Residence Nil Rate Band Works

As of the 2023/2024 tax year, the RNRB starts at £175,000. This figure is added to the standard Inheritance Tax nil rate band of £325,000. In total, this allows for up to £500,000 per person to be passed on before inheritance tax is due.

If a couple is married or in a civil partnership, they can potentially combine their allowances. This means up to £1 million can be shielded from inheritance tax when passing on a property.

Eligibility Criteria for the RNRB

To qualify for the RNRB, the property must be passed on to direct descendants. This includes children, grandchildren, and stepchildren, but not siblings, nieces, or nephews. The property must have been a residence of the deceased at some point, although it does not need to be the main home at the time of death.

If the estate is valued over £2 million, the RNRB is reduced by £1 for every £2 over this threshold. This tapering can significantly impact larger estates, reducing the potential benefit of the RNRB.

Transferring and Tapering of Allowance

If the first spouse or civil partner dies without using all of their RNRB, the unused portion can be transferred to the surviving partner. This effectively doubles the allowance available to the surviving partner's estate. However, any residual RNRB must be claimed within two years of the end of the month in which the second partner dies.

For estates over £2 million, the RNRB is tapered. This means higher value estates may not benefit fully from this allowance. Wealthier individuals need to carefully plan their estate to maximize tax relief.

Planning and Professional Advice

Proper planning is essential to make the most of the RNRB. Individuals should consider seeking professional advice to navigate the complexities of inheritance tax. Estate planning can involve trusts, gifts, and other financial instruments to minimise tax exposure.

Using the RNRB effectively requires understanding both the legal framework and personal estate details. Early and thorough planning can ensure that beneficiaries receive the maximum inheritance possible.