Inheritance Tax and the “Residence Nil Rate Band”

It is just over a year since the implementation of the Residence Nil Rate Band (RNRB). The RNRB is an additional Tax Free allowance (“Band”) which in some cases can help to reduce an individual’s Inheritance Tax (IHT) liability.

Inheritance Tax (IHT) is charged on the value of a person’s Total Net assets (Estate) after they have died. For many years, individuals have been eligible for a fixed rate Nil Rate Band (NRB) . This is currently £325,000. To the extent that a Deceased person’s assets do not exceed £325,000 there is no IHT payable. If the Estate exceeds £325,000 in value IHT is payable (with some exceptions) at 40% of all assets above that amount.

From April 2017 if a person dies having left their residence to a child or other direct descendant (including Grandchildren, Great Grandchildren and even step children etc.) there is potentially an additional £100,000 available to be added to the standard Nil Rate Band of £325,000. In April 2018 this figure increased to £125,000 per person and will rise annually by increments of £25,000 until the tax year 2020 to 2021. In that year the RNRB will amount to £175,000 (although to get the full benefit of this, the value of your home needs to exceed that figure).

The potential tax savings are significant and can be illustrated by the following example:

Molly’s Estate

Molly dies in May 2018 leaving an Estate valued at £1 Million (Net). Mollies husband Jack died in 2008 leaving his entire Estate to Molly. Molly and Jack had lived in their house “The White House” since 1985 and Molly continued to live there until she died. The White House was valued at £500,000 in May 2018. In her Will Molly left The White House to her two children, Donald and Kim. The rest of the Estate is left to Molly’s Grandchildren, Theresa, Angela and Emmanuel. Molly’s Estate can make use of the standard Nil Rate Band (£325,000) which was not used by Jack’s Estate since he left his estate to Molly. No IHT is payable on gifts between spouses. Molly’s Estate can also utilise Jack’s unused RNRB.

Molly’s IHT liability before applying Residence Nil Rate Band
Total Net Estate £1,000,000.00
LESS Molly’s Nil Rate Band £325,000.00
Jack’s unused Nil Rate Band £325,000.00
BALANCE subject to IHT £350,000.00
IHT at 40% £140,000.00
Using Residence Nil Rate Band
Estate £1,000,000.00
LESS Molly & Jack’s NRB’s £650,000.00
LESS Molly’s Residence Nil Rate Band (RNRB) £125,000.00
Jack’s unused RNRB £125,000.00
BALANCE subject to IHT £100,000.00
IHT at 40% £40,000.00

The Residence Nil Rate Band Rules are complex. However, there is plenty of scope for tax planning opportunities. A professionally drafted Will can significantly reduce the amount of IHT payable .

The Wills and Probate team at HSW have the benefit of practical experience drafting Wills and administering Estates with an element of the Residence Nil Rate Band being involved. It is clear from our experience that opportunities for tax savings can easily be lost if Wills are not properly drafted and Estates not properly administered.
If you require additional advice contact our Probate team on 01270 212000 or 01270 610300 or contact us via email here today to arrange a free, confidential and no obligation appointment to discuss with one of our solicitors any issues which you may have.