The residence nil-rate band (RNRB) is an additional allowance that can reduce the amount of Inheritance Tax (IHT) payable on an estate. It applies when the family home is inherited by the direct descendants of the deceased.

How does the residence nil-rate band work?

The RNRB allowance has been available since 6 April 2017, and the rate for 2023 is £175,000. The allowance would ordinarily increase in line with the Consumer Price Index (CPI), however, it has been frozen at the current level until April 2028.

To qualify for the RNRB, the property must have been a residence (although not necessarily the main residence) of the deceased. Buy to Let properties (for example) won’t qualify. The RNRB can be claimed by the direct descendants of the deceased (children, stepchildren, adopted children or grandchildren) after they have inherited it.

Before the RNRB was introduced, the Inheritance Tax Nil Rate Band was £325,000 per person (this is the value of an estate not subject to inheritance tax). The RNRB effectively boosts this by £175,000, giving a potential nil-rate total of £500,000 not subject to inheritance tax on death.

What’s more, the allowances are transferable between spouses. This means a couple in a marriage or civil partnership, could potentially pass on wealth of up to £1m on the second death, without incurring any inheritance tax at that point.

When a trust is set up solely for the benefit of children and grandchildren, the RNRB will apply

How to use trusts correctly to ensure RNRB applies

If you’re concerned about inheritance tax and hope to mitigate it through gifting, asset transfer or the RNRB, it’s important to check your position regularly.

There are a number of planning opportunities available to ensure that the RNRB is either fully utilised, or transferred, on the death of the first person, including the use of trusts. However, careful consideration must be given to the particular type of trust created, otherwise it might not deliver what you intended.

For instance, it used to be common practice for each spouse to leave their share of a property, up to the prevailing nil-rate band, in trust for their children. But a Will that relies on such a trust may not qualify for the RNRB because the beneficiary is the trust, and the RNRB only applies where the property is passed over directly. So, the type of trust used is important, as are the beneficiaries and their rights to the assets and income of the trust.

If the trust is set up solely for the benefit of children and grandchildren, the RNRB will apply. This is where the property is held absolutely for the benefit of the descendant or through an interest ‘in possession trust’, where the trust beneficiary has an immediate and automatic right to the income from the trust as it arises.

Other trusts, such as Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts, will also retain the additional nil rate band.

Professional advice is essential

With careful planning and advice, you’ll have a professionally drafted Trust (which is kept updated when any changes occur to either your personal circumstances or government legislation). This helps to make sure your family are properly provided for on your death and any liability to inheritance tax has been minimised.

In order to fully understand the RNRB, and how it will impact your estate, we’d recommend a review of your current legacy planning. Likewise, if you don’t have the necessary arrangements in place, it is vital that you take the appropriate measures, taking into account this legislation.

Amber River Independent Financial Planning

Preparing for inheritance tax is a vital piece of estate planning. By enlisting the expertise of an independent financial planner, you can navigate the complexities of IHT and have a financial plan in place that ensures your loved ones can reap the maximum rewards from your estate.

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