The residence nil rate band (RNRB) can increase the amount of your estate that will escape inheritance tax. But when can the RNRB apply and what steps can you take to ensure that your beneficiaries benefit from the tax savings? Lauren Herbert discusses.
Naturally, you want your beneficiaries to receive as much of your estate as possible. Inheritance tax (IHT) planning can play an important part in this. Making sure that your estate qualifies for the IHT residence nil rate band (RNRB) is a significant factor. When the RNRB was introduced it could shelter up to £100,000 of an estate from IHT but is now a huge £175,000.
When can the RNRB be claimed?
The RNRB is allowed if your estate includes your home and it is inherited by one or more of your direct descendants, e.g. child, grandchild, great grandchild, or their spouse, civil partner and their lineal descendants. It also applies where your home isn’t inherited by a descendant, but they receive all or part of its value. For example, where your executors sell the property and pass the proceeds on to your direct descendants. Plus, it can be claimed even if you sell one home and move into a less expensive one before you die. HMRC calls this the “downsizing allowance”.
The downsizing allowance applies even if you’ve sold or transferred your home and don’t buy another, say where you move in with a family member or live in rented accommodation.
To obtain the downsizing allowance, whoever administers your estate can make a claim if any of the following applies to your estate:
• You downsized on or after 8th July 2015
• You gave part of your home away
• You owned all or part of your home, and it would have qualified for the RNRB if you had not sold/transferred it.
Janet and John sold their jointly owned home in September 2018 for £300,000 and moved into rented accommodation. John died in May 2020. His estate is valued at £200,000 for IHT purposes. He left £100,000 to his daughter and the remainder to Janet. His executors can claim the RNRB of £100,000; it is capped at the lesser of the value of his half-share of the home, i.e. £150,000, and the amount inherited by his direct descendants, i.e. £100,000.
Unused downsizing allowance
The transfer of £100,000 of John’s estate to Janet doesn’t qualify for the RNRB because transfers to spouses are exempt from IHT. But as John’s estate only used 80% (£100,000/£125,000) of the maximum RNRB available, when Janet dies her estate can claim the difference of 20%. This means that if Janet dies while the maximum RNRB remains as £175,000, her estate can claim £35,000 (£175,000 x 20%) of the downsizing allowance not used by John’s estate – assuming the RNRB conditions are met.
Because no one knows what the future brings, whatever your age and health if you downsize or cease to own a home, it’s important to keep a record of the value of the property you moved from.
The RNRB can be claimed if a direct descendant inherits your home or value derived from its sale. If you sell and downsize homes, or sell and don’t purchase a new home, keep a record of the sale proceeds where your executors will find it. If you don’t, the RNRB claim may be understated or missed altogether.