Residence Nil-Rate Band Transfers

The residence nil-rate band (RNRB) is an additional allowance for Inheritance Tax (IHT) purposes in the United Kingdom. It is designed to make it easier for individuals to pass on their primary residence to their direct descendants, such as children or grandchildren, without incurring a significant IHT liability. The RNRB is, in addition to the standard nil-rate band, the portion of an individual’s estate that is not subject to IHT.

The RNRB can be transferred between spouses or civil partners when one partner dies, even if the first death occurred before the RNRB was introduced in April 2017. Any unused RNRB from the deceased partner can be added to the surviving partner’s RNRB, effectively increasing the amount of the estate that can be passed on without incurring IHT.

To illustrate how the transfer of the RNRB can save on Inheritance Tax, let’s consider the following example:

1. John and Jane are married, and John dies in 2022, leaving his entire estate to Jane. At his death, the standard nil-rate band is £325,000, and the RNRB is £175,000. As John’s estate passes to Jane, it is exempt from IHT due to the spouse exemption.
2. Jane died in 2023, leaving an estate worth £1 million, which includes their main residence valued at £400,000. The estate is left to their children.
3. At Jane’s death, the standard nil-rate band is still £325,000, and the RNRB is £175,000. As John did not use his RNRB, Jane can transfer the unused portion, doubling her RNRB to £350,000.
4. Jane’s total combined nil-rate bands are now £675,000 (£325,000 standard nil-rate band + £350,000 RNRB). The remaining estate value subject to IHT is £325,000 (£1,000,000 – £675,000).
5. The IHT rate is 40%, so the total IHT payable on Jane’s estate would be £130,000 (40% of £325,000).

By transferring the unused RNRB from John to Jane, the couple saved £70,000 in Inheritance Tax (40% of the additional £175,000 RNRB).

The tapered residence nil-rate band applies when the value of the deceased’s estate exceeds £2 million. For every £2 above this threshold, the RNRB is reduced by £1. This tapering can lead to the complete loss of the RNRB if the estate’s value is significantly above the £2 million threshold. It is important to note that this tapering only applies to the RNRB and not the standard nil-rate band.

In summary, the residence nil-rate band is an additional allowance for Inheritance Tax purposes that can help families pass on their main residence to their direct descendants with reduced tax liability. In addition, the RNRB can be transferred between spouses or civil partners, and the tapered residence nil-rate band applies when the estate’s value exceeds £2 million.

You can call us to discuss your personal circumstances with our specialist tax advisors.