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  • The most recent inheritance tax changes came into effect from 6 April 2017 including the introduction of a new Residential Nil Rate Band.

    UK property values have soared, especially in the London and the south East, with the result that growing numbers of estates are liable to inheritance tax.

    Under pressure to address this and to meet earlier promises to raise the nil rate band to £1 million, a new Residence Nil Rate Band (“RNRB”) was introduced with effect from 6 April 2017.

    In broad terms, the change in the legislation is to increase the amount of a person’s estate which can be passed on free from inheritance tax (“IHT”), where their estate includes their main residence, by providing an additional nil rate band – the RNRB.

    IHT is a tax paid on assets left when someone dies, after deducting the nil rate band and any other exemptions and reliefs that have been applied. Gifts in the seven years before death are also treated as part of the deceased’s estate. IHT may also apply to certain lifetime transfers.

    The residence nil rate band

    The nil rate band (“NRB”) is currently set at £325,000 (as at March 2018) and has remained at this level since 6 April 2009. The fixed level of the NRB combined with increasing house prices has meant that more estates than ever before exceed the nil rate band, as reflected in the Treasury’s receipts from IHT.

    The introduction of the RNRB is an attempt to address this.

    The value of the RNRB is being increased between 2017 and 2021 as follows:

    Year Residence Nil Rate Band
    2017/18 £100,000
    2018/19 £125,000
    2019/20 £150,000
    2020/21 £175,000


    For later years, the threshold will rise with inflation based on the Consumer Prices Index.

    Once the RNRB has been fully introduced from 2020/21 onwards, it will be worth £175,000 each or, for a married couple, a combined £350,000. Add that to the combined nil rate bands available for married couples of £650,000 and you reach the magic £1,000,000 threshold.

    The basic premise of this change to the IHT rules appears simple but the reality is that the detailed legislation and calculations can be complex.

    How the RNRB works on death

    The RNRB can be added to the NRB of £325,000 if the person and their estate meet the qualifying conditions.

    The amount of the RNRB due for an estate will be the lower of:

    • the value of the home, or the share that is passed to direct descendants, or
    • the maximum RNRB available for the estate when the person died.

    Similar to the NRB, it is possible to transfer unused RNRB to a spouse or civil partner.

    For higher value estates the value of the RNRB will be restricted. For each £2 that an estate exceeds £2 million, the RNRB will be restricted by £1. The result is that estates valued at £2.35 million or more will not benefit from the allowance at all (£2.7 million or more on the death of a second spouse).

    Example 1

    Bill and Clare are husband and wife and they have one daughter, Chloe. They own their main residence and some cash investments. Clare died on 1 March 2017 and left her entire estate to Bill. Bill died on 6 April 2017 and left his entire estate to his daughter, Chloe. As at the date of his death, the residence was valued at £650,000 and the investments were valued at £200,000.

    The RNRB available to the estate will be the lower of £650,000 (value of home passed to direct descendants) and:


    • Bill’s RNRB: £100,000
    • RNRB transferred from Clare: £100,000
    • Total: £200,000
    • Bill’s estate: £850,000
    • Combined RNRB: (£200,000)
    • Total: £650,000
    • NRB Bill: (£325,000)
    • NRB transferred from Clare: (£325,000)
    • Total: (£650,000)
    • Amount chargeable to IHT: NIL                                                       
    • IHT payable: NIL

    This can be contrasted to the situation before the change in the IHT legislation.

    If Bill had died on 1 April 2017, the situation would have been as follows:

    • Bill’s estate: £850,000
    • NRB Bill: (£325,000)
    • NRB transferred from Clare (£325,000)
    • Total: (£650,000)
    • Amount chargeable to IHT: £200,000
    • IHT at 40% on £200,000: £80,000


    Example 2

    Marion dies on 1 December 2020 leaving a flat worth £100,000 and other assets worth £500,000 to her son.

    The balance of her estate valued at £500,000 is left to her husband; this is exempt from inheritance tax due to the spouse exemption.

    The maximum available RNRB in the tax year 2020/21 is £175,000.

    The RNRB available to the estate is £100,000 being the lower of £100,000 and £175,000.

    The IHT calculation is as follows :

    • Chargeable estate (£500,000 to husband is exempt): £500,000
    • RNRB: (£100,000)
    • Total: £400,000
    • NRB: (£325,000)
    • Amount chargeable to IHT: £75,000

    The maximum possible RNRB for this estate was £175,000, but the flat left to the son is only worth £100,000. So only £100,000 of the RNRB has been used. The amount which is unused (£75,000) is available to transfer to the husband’s estate. There is no unused NRB available to transfer. 

    The downsizing provisions

    It is increasingly common for the elderly to “downsize” either for practical domestic reasons or to fund care. The legislation does cater for these situations.

    If a person dies after 5 April 2017 and has either disposed of their only residence on or after 8 July 2015 or downsized to a lower value property since that date, the downsizing provisions may apply. These provisions aim to restore some or all of the benefit of the lost residence nil rate band.

    The downsizing provisions provide that, as long as both the downsized residence (if any) and other assets in the estate are inherited by children or grandchildren of the deceased, the estate will qualify for an additional amount of nil rate band. This will be broadly equal to the lower of the amount of the residence nil-rate band and the value of the other assets inherited by the children or grandchildren.

    The precise rules differ depending on the facts of the situation and can be complex. For example, if the deceased sold his or her home and bought a new residence, the new residence must be left to children or grandchildren in addition to the other assets representing the funds realised as a consequence of the downsizing.

    If, however, the deceased disposed of his or her home but did not acquire a new residence, it is necessary only to leave other assets representing the funds realised as a consequence of the downsizing to his or her children or grandchildren to qualify for the additional RNRB.

    Residential property

    To benefit from the relief, the residential property must have been occupied by the individual as a residence at some point. However, it does not need to have been their main residence and therefore a holiday home or other second property could benefit. There is therefore scope for the executors to elect for which property should benefit from the relief.

    Further considerations

    The £2 million threshold is based on the gross value of the deceased’s estate before reliefs such as agricultural property relief or business property relief are deducted. It is therefore possible that the RNRB could be restricted even where the chargeable estate is less than £2 million if the gross amount, including agricultural and business property, is greater than £2 million. For such cases, careful planning would be required to ensure that the full benefit of the RNRB is available.

    The £2 million is tested at death and unlike IHT more generally there is no ‘look back’ to the previous seven years to include potentially exempt transfers such as gifts to individuals or chargeable lifetime transfers like gifts into trust. There could therefore be scope to make use of gifts to reduce the estate to less than £2 million threshold and ensure that the full RNRB was available.

    ETC Tax can advise on inheritance tax

    The RNRB impacts estates valued between the nil rate band and £2.35 million (£2.7 million on the death of a surviving spouse). Below the NRB, there is no issue as the estate is exempt, above the upper boundary then the RNRB will be fully withdrawn and therefore no additional relief is available.

    In light of this, those impacted should give careful consideration to their inheritance tax and estate planning, including considering how their wills might be appropriately drafted to maximise the availability of the relief.

    As experienced tax consultants, ETC provide inheritance tax planning advice to professional advisers and their clients, including families who are internationally mobile in their personal or business dealings.

    We offer the following related services, among others:

    Contact us for a no-obligation initial conversation about IHT planning with one of our chartered tax specialists.