This is due to the final increase in the residence nil-rate band (RNRB), which, when added to the nil-rate band (NRB) means that £1 million can be inherited by direct descendants, free of inheritance tax, where the estate includes the parents’ or grandparents’ main residence.
Who are your direct descendants?
Your direct descendants are:
- children, grandchildren or great-grandchildren and their spouses or civil partners
- adopted children
- foster children
- children who are under your guardianship
What is the nil-rate band (NRB)?
This is the amount you can leave when you die before IHT is payable. The threshold is currently £325,000 per person. Your spouse or civil partner can inherit your whole estate without paying IHT, but anyone else would have to pay 40 percent on any amount that you leave over £325,000. Your spouse or civil partner can also inherit your NRB allowance (or any percentage of it that you have not already used – see below), so, when they die, they can leave £650,000 before IHT is payable, plus the RNRB.
What is the residence nil-rate band (RNRB)?
The RNRB is an additional amount of money, over and above the standard NRB, that you can leave, free of inheritance tax, if you leave property that has been your main residence to your direct descendants.
It was introduced in April 2017 when it was set at £100,000 per person. It has increased by £25,000 per person, per year until April 2020 when the RNRB will be £175,000 per person. The RNRB allowance can also be inherited by your spouse or civil partner, adding £350,000 to their NRB of £650,000. This means they can leave up to £1 million to your direct descendants when they die before any IHT is payable. Any amount above this will be taxed at 40 percent.
Is there a limit to the property related allowance?
Once an estate reaches £2 million, you will start to lose the residence nil-rate band. You will lose £1 for every £2 of estate. This means that by the time the estate is worth £2.35 million, you will not benefit from the RNRB.
What if my spouse or civil partner leaves money to someone else when they die?
If your spouse or civil partner leaves money to someone else when they died, that will have used up some of their NRB allowance. For example, if your spouse died leaving an estate of £700,000 and they left £162,500 (50 percent of their NRB) to a child and the remainder to you, you will inherit 50 percent of your spouse’s NRB, so, when you die, you can leave your own NRB of £325,000 plus 50 percent of your spouse’s NRB (£162,500 at present), IHT free.
The same applies to your RNRB. If your spouse or civil partner died before you and passed on a percentage of their RNRB to a child and the remainder to you, the percentage that is left to you will be added to your own RNRB when you die, providing you leave it to a direct descendant and your estate includes your main residence. The home does not have to be the same main residence that you lived in when your spouse or civil partner died, as long as it is a home in which you live before you die.
The relevant amounts are based on percentages. This is so that, if the rates rise, your beneficiaries will benefit from a percentage of the higher rate. The NRB and RNRB are not interlinked. Your spouse or civil partner can leave different percentages of NRB and RNRB to someone when they die.
What if my spouse or civil partner died before the introduction of the RNRB?
In this case, they will not have passed on any of their RNRB, so, when you die, your personal representative can apply to have your spouse’s or civil partner’s RNRB to you and it can then be added to your own. So, from 6th April 2020, you will be able to leave up to £1 million to your direct descendants when you die.
Am I entitled to RNRB if I am not married to my partner?
Yes, your RNRB is individual to you. From 6th April 2020, you will be able to leave up to £500,000 (£325,000 NRB and £175,000 RNRB) to your direct descendants when you die if that amount includes your main home. You cannot, however, transfer your NRB or your RNRB to your partner if you are not married or in a civil partnership.
Contact us if you have any questions regarding the NRB or the RNRB or if you would like to discuss making your will.
Author: Anne Rogers, partner and head of the private client department.