‘What is the Residential Nil Rate Band (RNRB)?’ It is one of the most asked questions in the legal and financial sector. Most people get confused when it comes to this question, but it is not as complex as it seems!
The RNRB is the Residential Nil Rate Band, which can massively increase the amount of estate that can be inherited tax free. It allows an additional £175,000 to be claimed, alongside the basic inheritance tax threshold of £325,000. This means a single person can leave £500,000 of an estate tax free before the 40% inheritance tax (IHT) is deducted, overall significantly reducing or even eliminating the tax paid. For a married couple, this means they can leave an estate of £1,000,000 completely tax free!!!
Unfortunately, for the RNRB to be applicable, the estate must include a residence left to direct descendants in the deceased’s Will. A direct descendant (or lineal descendant) is any blood relative such as children or grandchildren, even including step children and adopted children. This truly highlights the importance of having a Will because you may miss the opportunity of £1,000,000 tax free inheritance, if the correct estate planning is not in place.
The Residence Nil Rate Band was formed on the 6th of April 2017, so any death after the 5th April 2017 may qualify, (provided the estate includes an estate left to direct descendants). The RNRB was only an additional £100,000 initially, however in the next tax year of 2018/19 it increased to £125,000 and this continued to increase, until it reached £175,000 in 2020 (where it is at present). It will continue to increase with the consumer price index, so it may even be higher in the future, again emphasising just how essential it is to plan your estate.
As well as this, it is important to note that for a married couple or civil partnership, if the RNRB rate of £175,000 has not been fully applied upon the death of the first spouse/partner, the unused portion can be transferred, and used upon the death of the surviving spouse/partner. They can even benefit if the first death occurred before the 6th of June 2017. Also, if the deceased has downsized or even sold the property (after the 8th of July 2015) but leave assets of equal value to lineal descendants in their Will, the RNRB may still be beneficial.
Overall, the RNRB is a fundamental addition to the existing Nil Rate Band that could significantly increase the amount of tax-free estate that can be left to your relatives after you die. If applied, you and your spouse/partner could leave £1,000,000 completely tax-free, so consider planning your estate to ensure the RNRB is applicable to your estate in the future!
If you would like more information please feel free to click the link below:
https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
By Emilia Sherriff (Work Experience Student from Plymstock School)