Residence Nil Rate Band: Maximise your IHT Allowances

Get to Grips with the RNRB

Launched in April 2017, the Residence Nil Rate Band (RNRB) is your ticket to boosting your inheritance tax threshold when passing down a home to your children or grandchildren. Think of it as a bonus on top of the standard Nil Rate Band (NRB), which sits at £325,000 for the 2022–2023 tax year. To calculate the amount of Residence Nil Rate Band that applies to your personal circumstances, you need a Residence Nil Rate Band calculator. The RNRB’s goal is to help you hand over the family home without a hefty inheritance tax (IHT) bill snapping at your heels.

Residence Nil Rate Band Calculators

To calculate the Residence Nil Rate Band, you can obtain a guide that will show what level band applies to your estate, but for complex estates, we would recommend that you provide full details of your assets to an experienced financial planner, as they will have a more sophisticated approach to calculating your RNRB, taking all the nuances of your estate into account.

Applying the RNRB: A Straightforward Guide

Here’s the deal: to tap into the RNRB, the deceased needs to have owned a home or part of one. This property must be part of their estate and left to their direct descendants. This extra inheritance allowance, now at £175,000 for 2022/2023, was gradually introduced and starts to phase out for estates over £2 million.

RNRB Thresholds and Rates: What You Need to Know

The RNRB journey began at £100,000 in April 2017 and increased to £175,000 by April 2020. It’s staying at this figure until April 2026. Remember, this is on top of your personal NRB. So, if you haven’t touched your NRB, you could be looking at a combined IHT threshold of up to £500,000.

Dealing with Homes Under the RNRB Cap

If your home’s value falls short of the RNRB cap, you can’t use the difference on other estate parts. For instance, if the home’s worth £150,000, that’s the maximum you can knock off the estate value under the RNRB, not the full £175,000.

Lifetime Gifts and the RNRB

Don’t overlook lifetime gifts when crunching your RNRB numbers. Gifts made within seven years of death get pulled back into the estate for IHT calculations. But here’s a kicker: the RNRB might still cover a home you’ve handed over if you downsized or sold it after July 8, 2015.

RNRB Essentials

  • It’s an extra layer on top of the standard NRB.
  • It’s specifically for passing down a residence to direct descendants.
  • The cap is £175,000 as of 2022/2023.
  • It starts reducing for estates over £2 million.
  • It’s still in play for downsizing or selling scenarios.

The Expanded Definition of Direct Descendants in UK’s Inheritance Tax

Understanding the RNRB’s Inclusive Approach

The UK’s Residence Nil Rate Band (RNRB) has reshaped the inheritance tax landscape with its broader definition of “direct descendants.” This move isn’t just about semantics; it’s a game-changer in how estates are passed down, reflecting the evolving nature of family structures.

Who counts as a direct descendant?

1. Beyond the Basics: The RNRB stretches the traditional boundary of direct descendants. It’s not just your biological kids or grandkids. Adopted, fostered, stepchildren, and those under your guardianship before they hit 18 are all in. And it doesn’t stop there—their own kids and grandkids are covered too.

2. Dependents: A Wider Net: The RNRB also looks out for anyone who leaned on the deceased for support. This inclusion is a nod to the diverse dependency relationships in modern families.

Wards of Court:

A Crucial Inclusion – as the RNRB rules recognise wards of court as direct descendants. If you were a legal guardian to a child who was a ward of court, that child is seen as a direct descendant under the RNRB. This inclusion is pivotal, acknowledging the deep bonds that can form in guardianship, akin to parent-child relationships.

The Big Picture – the RNRB’s definition of direct descendants is comprehensive. It’s not just about blood relations or legal adoptions. It covers stepchildren, foster children, wards of court. This broad scope ensures the RNRB can be applied to a variety of family situations, mirroring the complexity of today’s family dynamics.

Legacy Planning for Pre-2017 Deceased Partners – If your spouse or civil partner passed away before the RNRB kicked in, in April 2017, don’t overlook the RNRB implications for the surviving partner’s estate. This aspect of estate planning is crucial to ensure that the benefits of the RNRB are fully utilised.

Embracing Family Diversity in Estate Planning – the RNRB’s expanded definition of direct descendants is a testament to the UK’s commitment to accommodating the diversity of modern families in estate planning. It’s essential for individuals to grasp these nuances, as they significantly influence the application of the RNRB and, consequently, the Inheritance Tax implications for their estates.

Maximizing Inheritance Tax Benefits: Understanding Transfer of RNRB and NRB

1.Doubling Up on RNRB: A Survivor’s Advantage – Here’s a big win for surviving spouses or civil partners: the Residence Nil Rate Band (RNRB) is transferable. If your partner passed away before April 2017, they didn’t get a chance to use their RNRB (it didn’t exist yet). Good news for you – you can inherit their full RNRB. This means when it’s your time, your estate could wield a double RNRB, aligned with the limits at your death.

2. Passing on Unused NRB: A Legacy Benefit – Alongside the RNRB, there’s the standard Nil Rate Band (NRB), which also plays the transfer game. If your dearly departed didn’t use all their NRB, you can claim what’s left. This applies no matter when they passed, even pre-RNRB era.

3. Timing and Limits: The RNRB Balancing Act – The RNRB you inherit depends on the limits when you pass away, not when your partner did. Since the RNRB’s been on the rise since its debut, it’s a figure that could change. Keep an eye on this, as it impacts what you can transfer.

4. Qualifying for the Transferred RNRB – To use your partner’s RNRB, your estate needs to tick the same boxes as the standard RNRB requirements. This means owning a home or part of one, which is part of your estate and left to your direct descendants.

5. Smart Estate Planning: Making the Most of Transferred Allowances – For the surviving partner, it’s crucial to weave these rules into your estate planning. Make sure your will and estate strategies are tailored to leverage both the NRB and RNRB, including any transferred portions from your late partner.

In Summary: A Silver Lining for Surviving Partners – If your partner left this world before the RNRB came into play in 2017, there’s still a silver lining. Your estate can benefit from both the unused NRB and RNRB, potentially slashing your Inheritance Tax bill. But remember, it’s all about meeting the criteria and aligning with the rules at the time of your own death.

Ready to ensure your will is up-to-date and fully optimised to take advantage of the Residence Nil Rate Band by using our sophisticated RNRB Calculator.

Click here to schedule a consultation with our estate planning experts and secure peace of mind for you and your loved ones.

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Ray Best

Ray Best

Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.

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Residence Nil Rate Band: Maximise your IHT Allowances