Residential Nil Rate Band in the UK

The Residence Nil-Rate Band (RNRB) was introduced as part of a broader effort by the UK government to alleviate the impact of Inheritance Tax (IHT) on middle-class families, particularly those whose primary asset was the family home. It was first announced in the 2015 Summer Budget by then-Chancellor, George Osborne. The government recognized that rising property prices were pushing more estates over the IHT threshold, and many families were being forced to pay large tax bills on modest estates, especially when passing down family homes to children or grandchildren.

The RNRB was specifically designed to provide additional tax relief on the value of a home being left to direct descendants, such as children, step-children, or grandchildren. This relief is applied in addition to the standard Nil-Rate Band (NRB) of £325,000, potentially raising the total IHT-free allowance to £500,000 for an individual or £1 million for a married couple or civil partners when combined with transferable allowances.

When Does the Residence Nil-Rate Band Apply?

The RNRB can be used to reduce IHT on estates worth more than £325,000, provided the property is left to lineal descendants. Charlotte Toogood, Legal Services Director at Kings Court Trust, points out that the RNRB is not applicable to all estates.

“The introduction of the Residence Nil Rate Band is a complex relief which doesn’t impact all estates, and very often we come across estates where the relief is not available due to the estate not passing to lineal descendants,” she explains.

Transferring Unused Allowances Between Spouses

In cases where one spouse or civil partner has already passed away, it may be possible to transfer any unused NRB or RNRB from their estate, increasing the tax-free amount for the surviving partner’s estate. This can be particularly beneficial if the estate exceeds the £325,000 threshold.

Complexities in Claiming RNRB

Labour’s Chancellor Rachel Reaves is facing pressure to abolish RNRB in her upcoming budget on October 30th, with calls mounting for a reform of the Inheritance Tax system. Claiming the RNRB is not straightforward, often involving detailed tax forms that require HMRC review. This can delay the process of obtaining probate, as Charlotte highlights:

I would not be surprised if the RNRB is on Reeves’ list when reviewing the Inheritance Tax system.

We will keep you updated, if and when there are any changes.

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