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Confused about claiming residence nil rate band relief?

Working through Inheritance Tax (IHT) is difficult after any death. The residence nil rate band (RNRB) provisions for spouses or civil partners can be especially confusing to navigate.

For example, when the second individual passes away, any unused RNRB left over from the first individual’s death can be relieved – but some executors are using the value at the first person’s date of death to claim this, when they should be using the second person’s date of death.

It doesn’t seem like HMRC has been picking up on this error, so if you think a mistake has been made in RNRB relief value in a case like this, then you’ll have to write to them yourself.

This blog explains the basics of residence nil rate band relief and what to do if you need help with claiming RNRB transfers.

What is residence nil rate band relief?

The RNRB was introduced in April 2017 as an additional relief amount towards the value of a home on top of the standard nil rate band (also known as the IHT threshold).

The nil rate band means that every individual can transfer their estate up to a value of £325,000 without having to pay IHT. Anything above this will be charged 40% – unless it’s left to a surviving spouse under certain conditions.

Any unused proportion of the regular nil rate band
can be transferred to the surviving spouse’s allowance, increasing their threshold from the standard £325,000. Similarly, the residence nil rate band allowance of £175,000 can also be transferred if unused.

The RNRB applies more specifically to residences passed on to direct descendants. So, if the married couple’s home is left to their children or grandchildren when they pass away, they could claim up to £350,000
in unused RNRB relief.

This means that the total IHT relief for the estate could add up to £1 million. It’s also possible to claim RNRB on residences worth more than this, but the amount is tapered off by £1 for every £2 of the property value over £2 million.

This might not seem too complicated just yet, but actually filing a claim for RNRB relief can quickly become complex. When filling out the IHT436 form to make a claim, it’s easy to be confused by the wording HMRC

It suggests that the RNRB value is stated in entry 11
– at the first spouse’s date of death – while the current claim should be for the value at entry 14, at the second spouse’s date of death. This is where some executors make what could be a costly mistake if the estate isn’t taxed correctly.

What are the conditions for RNRB?

Unlike the normal IHT thresholds, the RNRB is not available against lifetime gifts, trust transfers, or any other possessions than one primary home.

The property only qualifies if all or part of it is inherited by ‘lineal descendants’ – including not just biological children and grandchildren, but also stepchildren and adopted or fostered children.

The home doesn’t have to be worth more than the basic threshold of £325,000 to qualify for RNRB relief. If it’s worth less than the RNRB threshold of £175,000, the remaining relief can’t be applied to the rest of the estate, but the unused amount can be transferred.

If the lineal descendant has also passed away, the home/estate and any remaining allowances can transfer to their surviving spouse or civil partner, who counts as a direct descendant.

Multiple lineal/direct descendants can inherit a share of the home, which must have been left to them in the deceased’s Will. They can choose to sell the home as part of the estate administration without invalidating the RNRB relief.

In the case of RNRB transfers from one spouse to another/to a direct descendant, the claim must be made within 2 years of the second spouse’s death.

Of course, there are far more rules for RNRB than these summarised points – you can find more information in the Inheritance Tax
section on the government website.

Need advice on claiming RNRB relief?

The government is keeping the IHT and RNRB
thresholds and tapers frozen at the 2020–2021 level until 2025–2026. While 94%
of estates are forecast to have zero IHT liability during this time, an estimated 161,900 will – including estates pushed over the threshold by inflation.

To help people with this complicated issue, HMRC has published RNRB guidance for calculating and applying this form of IHT relief. However, HMRC does not offer tax planning advice, and can’t provide individual guidance on how to take advantage of the residence nil rate band.

If you have concerns about this and aren’t sure which action you need to take to minimise your IHT liability and maximise your RNRB relief, it’s best to seek professional advice. Not only can an accountant help you with Wills and tax management for your estate, but they can also help you to apply tax relief transfers efficiently.

If you believe you could benefit from financial services like these, get in touch with GBAC, accountants in Barnsley, today.