Inheritance Tax (IHT) Planning

Nil-Rate Band & Residence
Nil-Rate Band Explained

The nil-rate and residence nil-rate bands offer significant tax-saving opportunities, Understand how these two key allowances work together to reduce the amount of inheritance tax your estate may owe.

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Inheritance Tax (IHT) Planning | Estate Planning | Trusts | Wills

The Nil-Rate Band (NRB)

This is a band of up to £325,000 available to all individuals, which can be used to reduce your taxable estate.

The amount may be reduced if you have made gifts within 7 years before your death.

You may also have an additional NRB transferred to you if you have been predeceased by a spouse or civil partner (see below).

The Residence Nil-Rate Band (RNRB)

The first £175,000 of the value of your main residence will be free of IHT if you leave it to your ‘direct descendants’, this includes children and grandchildren.

The RNRB may be lost or reduced if the value of your estate exceeds £2 million, or the value of your main residence is less than £175,000, or you do not have direct descendants (or do not wish to leave your property to them). Your financial adviser will be able to help you understand whether the RNRB will apply to you.

You may also have additional RNRB transferred to you if you have been predeceased by a spouse or civil partner.

Transferring Nil-Rate Bands to your spouse or civil partner

Anything you leave to your UK-domiciled spouse or civil partner is free from IHT at the time of your death and will not use the NRB or RNRB. However, keep in mind those assets now form part of their estate and may be subject to IHT on their death.

To help with this, any NRB and RNRB you don't use is transferred to your surviving spouse or civil partner for us on their death. This currently gives a potential total NRM of £1 million when combined.

For more information about Inheritance Tax, please click here to visit GOV.UK

Understanding and planning for Inheritance Tax (IHT) is crucial for protecting your family's financial future. By taking proactive steps, you can ensure that more of your estate is passed on to your loved ones rather than going to the taxman.

We offer complimentary consultations with a local financial adviser, including a free review of your assets and estate, along with our expert recommendations. There’s no obligation - fees only apply if you choose to proceed with our advice.

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The Main Residence Nil Rate Band (RNRB)

The Main Residence Nil Rate Band (RNRB) is an important aspect of Inheritance Tax (IHT) in the U.K, specifically designed to help individuals pass on their family home to direct descendants without incurring significant tax liabilities. Here’s how it affects IHT calculations:

Main Residence Nil Rate Band (RNRB) Overview:

What is the Main Residence Nil Rate Band (RNRB)?

Eligibility Criteria

To qualify for the RNRB, the following conditions must be met:

The property must be your main residence at the time of death.

It must be passed on to direct descendants, which include children, grandchildren, stepchildren, adopted children, or foster children.

The value of the estate must not exceed certain thresholds. The RNRB begins to taper away for estates valued at over £2 million.

Impact on IHT Calculations: Combining RNRB with Nil Rate Band

The RNRB is an additional threshold that can be applied to the nil rate band for estates that include a main residence passed on to direct descendants, such as children or grandchildren. As of April 2023, the RNRB is set at £175,000 per individual.

Example: If an individual’s estate includes a main residence valued at £500,000 passed to their children, the IHT calculation would be:

Nil Rate Band: £325,000

RNRB: £175,000

Total Tax-Free Threshold: £500,000

In this scenario, no IHT would be payable since the estate value equals the combined thresholds.

Impact on IHT Calculations: Tapering of RNRB

If the value of the estate exceeds £2 million, the RNRB begins to taper away. For every £2 over this threshold, the RNRB reduces by £1.

Example: If an estate is valued at £2.2 million, the RNRB would be reduced:

Original RNRB: £175,000

Tapering: £175,000 (£1 for every £2 over £2 million)

Adjusted RNRB: £150,000 (assuming a £200,000 excess).

The Main Residence Nil Rate Band: Calculation Example

Estate Value: £2.5 million

Nil Rate Band: £325,000

RNRB: £175,000

Tapered RNRB: £100,000 (hypothetical adjustment)

Total Tax-Free Threshold: £325,000 + £100,000 = £425,000

Taxable Estate: £2.5 million - £425,000 = £2.075 million

IHT Due: 40% on £2.075 million = £830,000

The Main Residence Nil Rate Band plays a crucial role in reducing the Inheritance Tax burden on estates that include a family home passed to direct descendants. By effectively combining the RNRB with the standard nil rate band, individuals can maximise the tax-free threshold for their estates. Proper planning and understanding of these thresholds can significantly benefit estate planning strategies.

Impact of Selling a Property on RNRB Eligibility

If a property that qualifies for the Main Residence Nil Rate Band (RNRB) is sold before the owner's death, several factors come into play regarding the eligibility for the RNRB. Here’s how it works:

1. RNRB Requirements

To qualify for the RNRB, the property must be the individual’s main residence at the time of death and must be passed on to direct descendants (such as children or grandchildren).

If the property is sold before death, the following considerations apply:

2. Replacement Property

If the individual sells their main residence but then buys another property, the RNRB can still apply to the new property if it becomes the main residence.

The key factor is that the new property must be the main residence at the time of death and meet the conditions for passing it on to direct descendants.

3. No Property Ownership at Death

If the individual sells their main residence and does not own any property at the time of death, they will not qualify for the RNRB. The allowance is specifically tied to the ownership of a main residence at the time of death.

4. Gift of Property

If the individual gifts the property to direct descendants before death and subsequently sells it, the RNRB would apply to the value of the property at the time of the gift, assuming the donor survives for seven years after the gift.

5. Downsizing Relief

If an individual sells a property that qualifies for the RNRB and then downsizes to a less expensive property, they may still be able to claim the RNRB on the value of the original property, provided it was passed to direct descendants.

This relief allows for some flexibility in estate planning, as it acknowledges that individuals may change their living circumstances.

Selling a Property on RNRB: Example Scenario

Original Property: An individual owns a home valued at £600,000 and plans to pass it to their children. They sell the property in 2022.

New Property: The individual purchases a smaller home valued at £300,000 and lives there until they pass away in 2024.

IHT Implications: If the new property is the main residence at the time of death and is passed on to direct descendants, the RNRB could still apply, potentially allowing for a tax-free threshold.

Selling a property that qualifies for the Main Residence Nil Rate Band before death can affect eligibility for the RNRB. However, as long as the individual has a new main residence at the time of death, or if they have downsized, they may still benefit from the RNRB. Proper planning and understanding of these rules can help maximize the tax advantages for heirs.

Downsizing Relief Overview

Downsizing relief in the context of the Main Residence Nil Rate Band (RNRB) is designed to support individuals who sell their main residence and move to a less expensive property, ensuring they can still benefit from the RNRB. Here are the specific rules and details regarding downsizing relief:

1. Eligibility Criteria

To qualify for downsizing relief, the following conditions must be met:

Sale of Main Residence: The individual must have sold or gifted a property that was their main residence.

Acquisition of a New Property: The individual must have moved to a less valuable property or have moved into a care home.

Time Frame: The sale of the original property and the subsequent move must occur at any time prior to death, but the downsizing relief applies specifically when claiming the RNRB.

2. Value Considerations

The downsizing relief allows the individual to claim the RNRB based on the value of the original property, even if the new property is of lower value.

The relief effectively allows for the RNRB to be calculated as if the individual still owned the original property.

3. Transferring the RNRB

If the property sold was worth more than the new property, the RNRB can be claimed based on the value of the original main residence up to the maximum limit. The RNRB applies as long as the property is passed on to direct descendants (children or grandchildren).

4. Main Residence Nil Rate Band Limitations

The downsizing relief does not increase the overall RNRB limit; it merely allows individuals who have downsized to still qualify for the RNRB up to the original property's value.

The RNRB limit is £175,000 (as of 2023) per individual and is subject to tapering for estates valued above £2 million.

5. Claiming the Relief

When filing the estate for IHT purposes, it is essential to declare the downsizing relief and provide details of the properties involved.

It is advisable to keep documentation of the sale of the original property and the purchase of the new property for accurate reporting.

Downsizing Relief (IHT): Example Scenario

Original Property: An individual sells their home for £600,000.

New Property: They purchase a new, smaller home for £300,000.

Death: The individual passes away and leaves the new property to their children.

RNRB Application: Although the new property is worth less, the individual can still claim the RNRB based on the original property’s value (£600,000), provided it meets the criteria for passing it to direct descendants.

Downsizing relief is a valuable provision that allows individuals who sell their main residence and move to a less expensive property to still benefit from the Main Residence Nil Rate Band. Understanding the eligibility criteria and how to claim this relief can significantly impact Inheritance Tax planning.

Implications of Gifting a Property That Is Not the Main Residence at Death

If a gifted property is not the main residence at the time of death, it has specific implications for Inheritance Tax (IHT) and the Main Residence Nil Rate Band (RNRB). Here’s how this situation is handled:

1. RNRB Eligibility

The Main Residence Nil Rate Band (RNRB) applies specifically to a property that was the individual's main residence at the time of death. If the gifted property is not the main residence at death, the RNRB cannot be claimed for that property.

2. Potentially Exempt Transfers (PETs)

Since the property was gifted, it is treated as a Potentially Exempt Transfer (PET). If the donor dies within seven years of making the gift, the value of the property may be included in the estate for IHT calculations.

If the donor survives for more than seven years, the property is generally excluded from their estate.

3. IHT Calculation

If the gifted property is not the main residence at the time of death and the donor dies within seven years of gifting:

The value of the gifted property will be included in the estate for IHT calculation.

The standard nil rate band (£325,000) will apply to the total estate value, and any amount above this threshold will be taxed at the standard rate of 40%.

4. No RNRB Application

Without the RNRB applying, the estate may face a higher IHT liability, especially if the total estate value exceeds the nil rate band.

Gifting a Property That Is Not the Main Residence at Death: Example Scenario

Original Gift: An individual gifts a property worth £400,000 to their child.

New Main Residence: The individual then moves to a different property, which becomes their main residence.

Death: The individual passes away three years later.

IHT Implications: The gifted property is not considered the main residence at the time of death, so the RNRB cannot be claimed for it. As the individual died within seven years of the gift, the value of the gifted property (£400,000) will be included in the estate for IHT calculations. The total estate value will determine whether any IHT is due.

If a gifted property is not the main residence at the time of death, it does not qualify for the Main Residence Nil Rate Band. The property may still be subject to Inheritance Tax if the donor dies within seven years of the gift.

Implications of Gifts Made More Than 7 Years Ago

1. Potentially Exempt Transfers (PETs)

Exclusion from Estate: Gifts made more than seven years before the donor's death are considered Potentially Exempt Transfers (PETs) and are excluded from the donor's estate for IHT purposes.

No IHT Liability: This means that the value of the gifted property will not be included in the estate when calculating IHT, regardless of whether the property was the main residence at the time of death.

2. No RNRB Application

Since the property is not part of the estate, the Main Residence Nil Rate Band (RNRB) will not apply to the gifted property. The RNRB is only relevant for properties that are included in the estate at death.

3. Impact on IHT Calculation

If the total value of the estate (excluding the gifted property) exceeds the nil rate band (currently £325,000), any amount above this threshold will be subject to IHT at the standard rate of 40%.

For example, if the estate is valued at £600,000 and includes no properties that are subject to PET rules, the calculation would be:

Total Estate: £600,000

Nil Rate Band: £325,000

Taxable Amount: £275,000

IHT Due: 40% of £275,000 = £110,000

4. Previous Gifts Still Considered

While gifts made more than seven years ago are excluded, any gifts made within the last seven years will still be considered for IHT calculations if the donor dies within that timeframe.

This means that if the donor made multiple gifts over the years, only the most recent ones (within seven years) would be relevant for IHT purposes.

Gifts Made More Than 7 Years Ago: Example Scenario

Gift: An individual gifts a property worth £400,000 to their child in 2010.

Death: The individual passes away in 2024.

IHT Implications:
- The gift made in 2010 is excluded from the estate since it was made more than seven years ago.

- The estate is valued at £600,000 at the time of death, but the IHT calculation will be based only on the estate's current value.

- If there are no other gifts made within the last seven years, the estate will be taxed solely based on its value above the nil rate band.

Gifts made more than seven years ago are effectively excluded from the estate for Inheritance Tax calculations, simplifying the IHT process for the remaining estate. Understanding the implications of these time frames is crucial for effective estate planning and tax management.

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