One of the main changes to Inheritance Tax legislation since the introduction of the transferable Nil Rate Band (NRB) in 2007 is the introduction of the Residence Nil Rate Band (RNRB) designed to assist parents to leave their main residence to their children.
RNRB started to be phased in from April 2017 with the initial allowance set at £100,000 increasing in increments of £25,000 each tax year until the full additional allowance of £175,000 for each individual became available in April 2020. This allowance of £175,000 has been frozen until April 2026.
RNRB is transferable between spouses and civil partners on death, and is also available even if a parent has to sell their own home to downsize or to meet residential care costs, provided that an equivalent value of their main residence is passed to a direct descendant.
As a result of this additional allowance a Husband and Wife/ Civil Partners who have all available allowances can pass a combined estate with a value of up to £1million pounds tax free (£325,000 NRB and £175,000 RNRB each)
Sadly it is not a simple process and the increase in the Nil Rate Sum has many complications.
The biggest problem is that it is only fully beneficial to families who have a house worth at least £350,000 and an estate with a gross value below £2 million.
If the property value does not equal or exceed the amount of the RNRB available, then the unused sum cannot be applied against the value of the other assets in the estate. For example, the property is worth £300,000 and the rest of the estate is worth £1 million. £300,000 of the available £350,000 RNRB can be used against the property, but the remaining £50,000 cannot be used to offset the Inheritance Tax (IHT) charge on the rest of the estate. The maximum Nil Rate Sum claimable to offset the IHT on the rest of the estate will be limited to £650,000, being two Nil Rate Sums of £325,000 each, thus leaving £50,000 subject to IHT at 40% making an IHT liability of £20,000.
Another difficulty is that if the total value of your estate exceeds £2 million the RNRB will be reduced by £1 for every £2 that you have over £2 million.
In order to make sure that you can benefit from RNRB you must ensure that your combined estates fall within the £2 million threshold and that you leave your assets to a direct descendant.
In many cases this may mean that you have to revisit your Will to ensure that you comply with this requirement. For example, if you have left your residuary estate to a Discretionary Trust, even with a class of beneficiaries that may include your children and or grandchildren, it is possible that this additional amount may not be claimable because you have not left your main residence to a direct descendant.
Similarly, if you have left your spouse a life interest in your property and thereafter into a Discretionary Trust for grandchildren it may not apply.
To be absolutely sure that the RNRB is going to be available for your Executors to claim on your behalf you must leave your property, or an equivalent sum, if the property has been sold to pay for residential care fees, to a direct descendant.