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Residence Nil Rate Band | Inheritance Tax Relief

Published by Merisha Shrestha
Published Date: June 13, 2023
Categories: Inheritance Tax

In a world where home is not only where the heart is but also a significant part of one's wealth, passing on the family home to loved ones becomes a matter of careful consideration. Introducing the Main Residence Nil Rate Band (RNRB), which allows passing down of family home to future generations without the burden of hefty tax implications.  

This article aims to unlock the doors to understanding Main Residence Nil Rate Band, equipping you with the knowledge necessary to make well-informed decisions as you navigate the complex world of estate taxation.

Defining Main Residence Nil Rate Band

Introduced in April 2017, the Main Residence Nil Rate Band (RNRB) is an extra threshold that can be claimed in addition to the general nil rate band (£325,000 in 2022/23).

Its purpose is to reduce the tax burden for individuals who wish to pass on their main residence to direct descendants. The RNRB specifically applies to deaths that occurred on or after 6 April 2017.

Qualifying Criteria for the Main Residence Nil Rate Band

The Main Residence Nil Rate Band is available where the following criteria are met:

1. Qualifying Property

The estate must include a "qualifying residential property" which is recognised as the primary residence of the individual. This may be a house, apartment, or any other form of dwelling, provided that it has served as their main home at some stage during their ownership.

vector image illustrating the property that qualifies  the Criteria for the Main Residence Nil Rate Band

The RNRB is restricted to a single residential property per estate. If there are multiple properties within the estate that were used as residences by the deceased, the Executors have the authority to select which residential property qualifies for the Main Residence Nil Rate Band (RNRB).

2. Direct Descendants

The Residence Nil Rate Band can only be claimed when the property is passed on to direct descendants upon the individual's death. Direct descendants include children (including stepchildren, adopted children, and foster children), grandchildren, and other lineal descendants.

vector image representing the direct descendants for the residensial property

There is no obligation for the descendants of the deceased to inhabit the residence following their death. In numerous instances, the property is sold, and the resulting cash proceeds are then distributed to the children/grandchildren as part of the inheritance. Even in these situations, the Residence Nil Rate Band remains available.

Relief Mechanism of the Residence Nil Rate Band

The Residence Nil Rate Band grants an additional amount on which Inheritance Tax (IHT) is exempted at a rate of 0%. It's important to note that the RNRB applies solely to the estate of the deceased upon their death. It does not apply to any lifetime transfers of a residence, such as a Potentially Exempt Transfer (PET) that becomes subject to tax due to the death of the individual.

The value of main residence nil rate band is determined based on the lower of two factors:

  • Net value of the qualifying residence which is the value of the residence after deducting liabilities.
  • The "residential enhancement," which is £175,000 for 2022/23.

For example, 

Sarah passed away in March 2023, leaving behind an estate valued at £850,000 and consisted of a main residence worth £500,000, chattels worth £50,000, and investments worth £300,000. Sarah, who was widowed, had two children to whom she divided her estate equally according to her will. Sarah did not engage in any lifetime transfers.

Now let's calculate the Inheritance Tax (IHT) due on Sarah's death, taking into account the availability of the Residence Nil Rate Band.

Total estate: £850,000

Less: Residence NRB (£175,000)

Less: General NRB (£325,000)

Taxable estate: £350,000

IHT calculation:

Taxable estate (£350,000) x Tax rate (40%) = £140,000

Therefore, the Inheritance Tax due on Sarah's death would be £140,000.

Tapered Withdrawal of Residence Nil Rate Band

The RNRB is subject to a tapered withdrawal for estates worth over £2 million. Therefore, the Residence Nil Rate Band is reduced by £1 for every £2 over the threshold. This is also known as ‘Adjusted Allowance’.

For example, 

Suppose Sarah's estate is valued at £2,200,000, consisting entirely of her main residence. Since the estate's value exceeds £2 million, the residence nil rate band is subject to restriction. The calculation is as follows:

Residence NRB: £175,000

Restriction (½ × (£2,200,000 – £2,000,000)): £100,000

Adjusted Allowance: £75,000

Therefore, the residence nil rate band available to Sarah is only £75,000.

Calculating inheritance tax can be complex, especially when considering the Residence Nil Rate Band.

To simplify this process, we've created an easy-to-use Inheritance Tax Calculator. Know the applicable tax applicable on your Inheritance Tax.

Transferring Unused Residence Nil Rate Band

The unused portion of the main residence nil rate band can be transferred between spouses and civil partners after one of them passes away. This transferable portion is known as the 'Brought Forward Allowance'.

This transferability remains valid even if the first spouse who passed away did not have a qualifying residential interest at the time of their death. However, it's important to note that the brought forward allowance can only be utilised in respect of the death estate.

Conclusion

Understanding the Main Residence Nil Rate Band is essential for effective estate planning in the UK, particularly regarding the transfer of family homes to direct descendants.

By meeting the eligibility criteria and employing appropriate strategies, individuals can maximise the relief available and ensure their loved ones inherit their family home with reduced tax implications.

If you're looking for more comprehensive assistance in estate planning and inheritance tax, explore our Inheritance Tax Planning Services for a secure future.

Merisha Shrestha
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