Zero tax rate up to £1 million? Residence Nil Rate Band (RNRB)

In 2017, the implementation of the Residence Nil Rate Band (RNRB) represented a landmark addition to inheritance tax law, fundamentally altering estate planning strategies.

This specialised relief is applicable to deaths occurring on or after 6 April 2017, where the deceased passes on all or part of their property, previously their residence (excluding buy to let properties), to one or more direct descendants.

The RNRB offers a significant departure from the standard Nil Rate Band (NRB), specifically tailored to address the rising concern over property values and their impact on inheritance tax liabilities. Unlike the NRB, which applies universally to an individual's assets, the RNRB focuses on property assets passed down to direct descendants, such as children, stepchildren, adopted children, and foster children, along with their lineal descendants; this may be through the terms of the deceased's will, intestacy rules, or by survivorship.

Since its introduction in the 2017/18 tax year, the RNRB has seen incremental increases, currently standing at £175,000 for the 2023/24 tax year.

Broadly, on a straight forward estate where everything passes to a surviving spouse on first death, the combination of the Nil Rate Band of £325,000, the Transferrable Nil Rate Band also of £325,000, the RNRB of £175,000 and the transferrable RNRB of £175,000 adds up to a total of £1m charged to tax at 0% (subject to any life time gifts in the last seven years before the date of death).

If the property was sold prior to death, the eligibility for the Residence Nil Rate Band (RNRB) remains intact if the deceased sold their home or downsized to a less valuable residence on or after 8 July 2015. In such cases, the value of the downsized residence or the equivalent value of the original home sold would still qualify for the RNRB.

The RNRB's significance in estate planning cannot be overstated. It has prompted individuals and families to reconsider their strategies, capitalising on the additional relief offered for passing down family homes. Not only does this lighten the tax burden on future generations, but it also streamlines the preservation of familial assets. Moreover, the ability to transfer any unused portion of the RNRB to a surviving spouse or civil partner effectively doubles the potential tax relief for couples, providing additional flexibility in estate planning.

However, navigating the nuances of the RNRB requires careful consideration and professional guidance. Eligibility criteria, thresholds, and tapering rules add complexity to estate planning strategies, necessitating a thorough review of wills, trusts, and asset structures. The introduction of tapering provisions for estates valued over £2.35 million further complicates matters, requiring proactive adaptation to ensure tax-efficient planning.

However, not every estate benefits; if there are no direct descendants inheriting or the value of the estate exceeds £2.35 million, the RNRB is unlikely to apply.

In conclusion, the Residence Nil Rate Band (RNRB) presents valuable opportunities for property owners with descendants, offering significant reductions in Inheritance Tax (IHT) liabilities upon death. However, it's essential to consider potential scenarios where this relief might not apply fully. It's crucial to review your will to ensure alignment with RNRB rules and explore strategies to optimise estate planning.