What is the Residence Nil Rate Band (RNRB)? 

The Residence Nil-Rate Band (RNRB) was introduced as part of a broader effort by the UK government to reduce the impact of Inheritance Tax (IHT) on middle-class families, especially those whose primary asset was a family home. It was first announced in the 2015 Summer Budget by then-Chancellor George Osborne. The government recognized that rising property prices were pushing more estates over the IHT threshold. This meant many families were being forced to pay large tax bills on modest estates, especially when passing down family homes to children or grandchildren. 

The RNRB came into effect on 6 April 2017, and it was phased in over a period of four years. Starting at £100,000, it increased annually by £25,000 until reaching the current maximum of £175,000 in April 2020. 

 The RNRB was specifically designed to provide additional tax relief on the value of a home being left to direct descendants, such as children, step-children, or grandchildren. This relief is applied in addition to the standard Nil-Rate Band (NRB) of £325,000, potentially raising the total IHT-free allowance to £500,000 for an individual or £1 million for a married couple or civil partners when combined with transferable allowances. 

When does the Residence Nil Rate Band apply? 

The RNRB can be used to reduce IHT on estates worth more than £325,000, provided the property is left to lineal descendants. Charlotte Toogood, Legal Services Director at Kings Court Trust, points out that the RNRB does not apply to all estates. 

“The introduction of the Residence Nil Rate Band is a complex relief which doesn’t impact all estates, and very often we come across estates where the relief is not available due to the estate not passing to lineal descendants,” - Charlotte Toogood

 

Key points of Residence Nil Rate Band 

• A deceased must have owned an interest in a property on the date of their death. If they previously owned a property, but sold it before their death, they must have owned that interest in a residence on or after 8 July 2015.
• If the interest in their home was worth less than £175,000, then only the actual value of the residential interest is allowed (not the full RNRB).
• Does not include descendants such as nephews and nieces, but does include step-children (although not the children if unmarried). Best practice is to check whether beneficiaries qualify under the rules.
• If the value of a deceased estate exceeds £2.35 million, RNRB relief isn’t allowed.
• If the value exceeds £2 million, a taper is applied, and the relief is reduced by £1 for every £2 that the value exceeds £2 million.
• The descendant must become beneficially entitled to the residence on the death of the person.
• The RNRB legislation states that if a lineal descendant does not inherit directly on the death of the person, for example, if a Will specifies an age or includes a Discretionary Trust, then the RNRB may be lost along with the potential IHT saving of up to £140,000. 

Transferring unused allowance between spouses

In cases where one spouse or civil partner has already passed away, it may be possible to transfer any unused NRB or RNRB from their estate, increasing the tax-free amount for the surviving partner’s estate. This can be particularly beneficial if the estate exceeds the £325,000 threshold.

You should speak to estate planning specialists if your estate value is near or over the thresholds, as steps can be taken during lifetime and after death to mitigate the IHT estate.