More and more individuals’ estates are being subject to an Inheritance Tax liability. In fact, HMRC figures show £6.1 billion was collected in Inheritance Tax over the last financial year - an increase of 14% from 2020/2021. So, how do you plan early to alleviate your family’s worries after you pass away?

The starting point is you being aware of your available Inheritance Tax allowances.  With rising property values this blog will focus on the availability of the Residence Nil Rate Band (RNRB).

What is the RNRB?

The RNRB is an additional allowance, above the Nil Rate Band (the threshold at which no Inheritance Tax is paid) and is available to those who own their own property. When available the RNRB can increase your Inheritance Tax threshold by a value of up to £175,000.

For example, if you qualify for the RNRB and have the full current available Nil Rate Band of £325,000, then your estate would only be subject to Inheritance Tax if your total estate value exceeds £500,000. 

Do I qualify?

Unlike the Nil Rate Band, which is available to everyone, you need to meet certain criteria before your estate can use the RNRB. They are: -

• You own your own residential property in the UK (either jointly or in your sole name);
• The residential property is inherited by your direct descendants; and
• Your total estate is worth less than £2 million pounds when you pass away.

If you qualify for the allowance, the extent of the RNRB depends on the value of your share of the relevant property. So, for example if your share in the relevant property is worth £50,000, then you can only claim £50,000. Whereas if your share in the relevant property is worth £200,000, then you can only claim £175,000 – being the maximum allowed under current regulations.

What is a direct descendant?

Your children, grandchildren, step-children and adopted children all fall under the regulations. Also, the spouses of any of your children, grandchildren, step-children and adopted children are considered to be your direct descendants. 

But under the regulations your siblings, nieces and nephews are not considered your direct descendants.

Remember if you leave your house, assets or whole estate to your spouse – this transfer is exempt from Inheritance Tax, and the RNRB wouldn’t need to be used.

Can I leave my house to more than one individual and still use the RNRB?

Yes, you can leave the property to more than one individual. If all of them are considered as your direct descendants, then your estate can use the full available RNRB. Where there is a mix of direct descendants and non-direct descendants, then the proportion of the property going to your direct descendants is used to calculate the available RNRB.

Can I transfer my RNRB to my spouse?

Yes, like the Nil Rate Band, you can transfer your RNRB to your surviving spouse for them to use on their death. On their death, and to benefit from the RNRB, their estate would still need to meet the key criteria. So, your surviving spouse could have an Inheritance Tax threshold of £1 million pounds before their estate was subject to Inheritance Tax under the current regulations. 

So, I qualify to claim the RNRB – what should I do next?

At TC Young we encourage you to plan for your and your family’s future. This will provide you with peace of mind that your affairs after death will not cause your family unnecessary stress. Therefore, please get in touch with our Private Client team to discuss your circumstances.