Inheritance Tax (IHT) is a significant concern for many, especially when it comes to family homes.
To alleviate some of this burden, the Main Residence Nil-Rate Band (RNRB) was introduced on 6 April 2017, providing valuable relief to individuals passing their home to direct descendants.
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Topics Discussed:
- Key aspects and benefits of a Deed of Variation
- Tax implications associated with a Deed of Variation
Introduction to the Main Residence Nil-Rate Band
The Main Residence Nil-Rate Band (RNRB) was designed to address the growing concern that the traditional nil-rate band (£325,000 per individual until April 2028) was not keeping pace with the rising property values.
Introduced in 2017, this additional relief aims to prevent families from having to sell their homes to pay large IHT bills.
Understanding the RNRB
Incremental Increase and Current Status Tax (IHT)
Initially set at £100,000 for 2017-18, the RNRB has incrementally increased by £25,000 each year until 2020-21, reaching £175,000.
According to the Finance Act 2021 and extended by the Finance Act 2023, this allowance will remain at £175,000 until April 2028.
This means that a married couple or civil partners can combine their RNRB, potentially providing up to £1 million in IHT relief.
Tapering for Large Estates
However, this relief is not unlimited.
For estates exceeding £2 million, the RNRB is tapered, reducing by £1 for every £2 over the threshold.
This tapering is also frozen until April 2028, ensuring that larger estates will face a reduced benefit from the RNRB.
Key Features of the RNRB
Transferability
One of the most significant aspects of the RNRB is its transferability.
If a person’s RNRB is not fully utilised upon their death, the unused portion can be transferred to a surviving spouse or civil partner.
This provision ensures that the surviving partner can benefit fully from the combined RNRB.
Direct Descendants Requirement
The RNRB applies only if the property is passed to direct descendants, such as children, stepchildren, adopted children, or grandchildren.
If the property is left partly to direct descendants, the relief is proportionally reduced.
Importantly, only one property can qualify for the RNRB, but individuals can elect which property if they own more than one.
It is also notable that the property need not be the main residence at the time of death, provided it has been a residence at some point.
Downsizing Provisions
The RNRB also includes provisions for those who have downsized or sold their property before death.
This ensures that individuals who have moved to smaller properties or sold their home can still benefit from the RNRB, provided they leave assets of equivalent value to direct descendants.
Recent Updates and Legislative Changes
The Finance Act 2023 confirmed that the RNRB would remain at £175,000 until April 2028, extending the freeze initially set by the Finance Act 2021.
This extension provides stability and predictability for estate planning over the coming years.
Practical Example
Consider a couple, Mr. and Mrs. Brown, who own a home worth £400,000.
If Mr. Brown dies in 2017-18 and leaves his share of the home to Mrs. Brown, she does not use any of his RNRB.
Upon Mrs. Brown’s death in 2023-24, the house is worth £400,000, which she leaves to their children.
Mrs. Brown’s estate can claim her RNRB of £175,000 and Mr. Brown’s unused RNRB of £175,000, totalling £350,000 in RNRB.
This significantly reduces the IHT liability on the estate.
Detailed Breakdown of the RNRB
Historical Development and Increases
The RNRB started at £100,000 for the tax year 2017-18 and increased by £25,000 annually, as follows:
- 2017-18: £100,000
- 2018-19: £125,000
- 2019-20: £150,000
- 2020-21: £175,000
The Finance Act 2021 legislated that the RNRB would remain at £175,000 until April 2026.
The Finance Act 2023 extended this freeze to April 2028.
Tapering Provisions
For estates exceeding £2 million, the RNRB is reduced by £1 for every £2 over this threshold.
This means that estates worth significantly more than £2 million may see a reduced or eliminated RNRB benefit. The tapering threshold is also frozen until April 2028.
Transferability and Prioritisation
The RNRB is transferable between spouses or civil partners.
If the first spouse or partner dies without fully using their RNRB, the unused portion can be transferred to the surviving spouse or partner.
The RNRB is used in priority over the standard nil-rate band, providing an additional layer of relief before IHT is applied.
Direct Descendants and Property Requirements
The RNRB applies when a residence is passed to direct descendants.
This includes children, stepchildren, adopted children, and grandchildren.
The relief is proportionally reduced if the property is only partly left to direct descendants.
Only one property can qualify, but if multiple properties are owned, an election can be made as to which property will benefit from the RNRB.
Importantly, the property does not need to be the main residence at the time of death as long as it has been a residence at some point.
Downsizing and Sale Provisions
The RNRB includes provisions for individuals who have downsized or sold their property before death.
This ensures that those who move to smaller properties or sell their home can still benefit from the RNRB, provided they leave assets of equivalent value to direct descendants.
This is known as the “downsizing addition” and must be claimed within two years of the end of the month of death.
Recent Legislative Updates
The Finance Act 2023 extended the freeze on the RNRB and the tapering threshold until April 2028, providing clarity and stability for estate planning.
Examples of Application
Example 1: Married Couple with Transferred RNRB
Mr. Green dies in 2018-19, leaving his estate, including his share of the family home, to his wife, Mrs. Green.
No RNRB is used at this point. When Mrs. A dies in 2024-25, her estate includes the family home worth £500,000.
Mrs. Green’s estate can claim her own RNRB of £175,000 and Mr. Green’s unused RNRB of £175,000, totalling £350,000.
This reduces the taxable estate, significantly lowering the IHT liability.
Example 2: Downsizing Scenario
Mrs. White sells her home worth £400,000 in 2019-20 and moves to a smaller property worth £200,000.
She passes away in 2024-25, leaving her estate, including the new property and other assets, to her children.
Her estate can claim the RNRB on the value of the original home, providing relief even though she no longer owns the larger property at the time of death.
Practical Considerations and Planning Points
Reviewing and Updating Wills
It is crucial to review and update wills to ensure that they take full advantage of the RNRB.
This includes specifying which property should benefit from the RNRB if multiple properties are owned and ensuring that the property is passed to direct descendants.
Estate Value Management
Managing the value of the estate to stay below the £2 million taper threshold can maximise the benefit from the RNRB.
This may involve making lifetime gifts, using trusts, or other estate planning strategies to reduce the estate’s value.
Summary
The Main Residence Nil-Rate Band provides significant relief for families, ensuring that the family home can be passed on to the next generation with reduced IHT liabilities.
Understanding and effectively utilising the RNRB can lead to substantial tax savings, making it an essential component of estate planning.
To ensure you are making the most of this relief, it’s vital to stay informed about legislative changes and consider professional advice.
To help understand inheritance tax and secure your family’s financial future, contact Help Me Legal for expert guidance.
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