Residence nil rate band: don’t miss out

TaxTalk - February 2024

read timeRead time: 15 mins

None of us like to dwell on a time when we’ll no longer be around. But doing the best for our beneficiaries means careful Inheritance Tax planning. Personal Tax Manager Sam Meir provides some pointers.

Inheritance Tax (IHT) tends to make headlines around election times. Being a particularly unpopular tax, cutting or scrapping it would seem like an easy political win. But it brings the Government billions every year and is relevant to fewer than 4% of deaths. The good news, though, is that the residence nil rate band (NRB) is one way many families manage to stay outside the IHT net.

What is the residence NRB?

Many people will be familiar with the standard NRB of £325,000 for IHT. It means if your estate doesn’t reach this threshold, it is not subject to IHT. The residence NRB extends this by £175,000 where residential property, which was the deceased’s main home at some point, is left to a direct descendant. This includes children, grandchildren, stepchildren and adopted children.

Just like the standard NRB, unused thresholds can pass to a surviving spouse. In theory, this means a married couple can have up to £1m in tax-free thresholds. If your assets are subject to IHT, the tax is currently 40%. This is a substantial rate that your descendants will need to plan for. That means the residence NRB could save a couple up to £140,000.

Am I eligible to receive it?

The first criterion is that a residential home is left to a direct lineal descendant. The amount available is the lower of the £175,000 threshold and the value of the residence passed on. If more than one residence is inherited, only one can qualify.

There is also a tapering provision which removes the relief from high-value estates. For every £2 over the threshold of £2m, £1 of residence NRB is lost. So estates worth over £2.35m will not qualify for the relief and should consider lifetime IHT planning to bring the estate value below this threshold.

It’s worth noting, too, that if the residential NRB is passed to a surviving spouse, there is no taper when the first spouse dies. Tapering is only looked at on the second death. This opens up more planning opportunities.

What if my new home is worth less than the threshold?

Reliefs can be available where someone has downsized or sold their home, even if the home is no longer in the estate at the date of death. So long as certain conditions are met, such as still passing assets to lineal descendants, there is a provision to bring relief back in line with what would have been allowed before the downsizing.

I may be subject to IHT – what can I do?

If your estate exceeds the £1m or £2.35m thresholds, there’s a good chance you will be exposed to IHT. But with some careful planning and use of generous available reliefs, it’s often possible to dramatically reduce IHT, if not completely avoid it.

IHT planning should be an ongoing process that grows and changes with your circumstances. And an important part of that process is checking whether you qualify for major reliefs like the residence NRB.  

If you have any questions, or think you might be affected by Inheritance Tax and want guidance on appropriate planning, please contact Private Client Manager Sam Meir.