Overview

 The extra nil rate bands are fully available to anyone who:

• passes the family home to ‘direct descendants’ - broadly their children/grandchildren and/or their spouses on death, or
• had a family home, then downsized on or after 8 July 2015 (passing on assets of equivalent value to children/grandchildren in their will),
• and has a net estate below £2M

The ability of the legal personal representatives (LPRs) to claim the residence nil rate band (RNRB) will depend on various conditions being met.

Meeting the RNRB conditions

Eligible property

To claim the RNRB, there must be an eligible property that is left to direct descendants on death (unless downsizing provisions apply, see below). In the majority of cases, this will be a property that at some point has been the home of the deceased. The individual doesn't have to be living there at the time of their death. For example, if they've moved into residential care and the property has been let out, it will remain eligible for the RNRB as long as all other conditions are met.

The property itself can include dwellings such a static caravan or even a houseboat if it can be demonstrated that this was in fact their home.

Where there's more than one eligible property in the estate, the LPRs can choose to nominate which one can use the RNRB. An eligible property can be situated in or outside of the UK. Only one property can be nominated in this way. Any surplus RNRB cannot be set against another property in the estate (although if there was a surviving spouse it could always be brought forward as part of their RNRB). A property that has been a buy to let for investment purposes only and never lived in by the deceased cannot be used in claiming the RNRB. 

Direct descendants

Children, grandchildren and their spouses are the most common examples of ‘direct descendants’. However, foster, adopted, wards and step-children may also be included.

Brothers, sisters, nephews and nieces of the deceased are not direct descendants. If a property is left wholly to one of these family members, then no RNRB is available.

Where a property is left in part to a direct descendant and in part to, for example, a nephew or niece, the maximum RNRB will be capped at the value of the part of the property left to the ‘direct descendant’.    

Leaving a property to a direct descendant

The RNRB is only available when a property (or other assets when downsizing provisions apply) included in the deceased’s estate is left to direct descendants. 

The estate can claim the RNRB if the property is left as a specific bequest to children and grandchildren. The estate can still claim the RNRB if the LPRs sell the property and give the children/grandchildren the cash rather than transferring the ownership of the property.

It may also be available where the children/grandchildren are entitled to a share of the residue of the estate which includes the value of the property. If the residue is to be shared between beneficiaries, the property is deemed to be inherited in those proportions.

However, the RNRB amount may be restricted if the total value of the property shares forming part of the direct descendants' entitlements to the residue is less than the maximum RNRB amount. This could be the case if part of the residue passes to beneficiaries who are not direct descendants.

Leaving a property in trust

Trusts with a ‘qualifying interest in possession’

The RNRB is available when a property or share of a property is left to a ‘direct descendant’ as a beneficiary of one of the following trusts:

• Immediate post death interest (IPDI)
• Bereaved Minor’s Trust and 18-25 trust (set up for children on death of parents)
• Disabled trust
• Absolute trust

Where an IPDI trust has been set up and the surviving spouse or civil partner has the interest in possession, the RNRB of the deceased spouse can be transferred and will be available to the estate of the life tenant as long as the property is then left to the life tenant’s direct descendants.

If the value of a trust, is included in a beneficiary’s estate for IHT (e.g. IPDI or absolute trust) this can affect their own entitlement to RNRB if their personal estate and the value of the trust is more than £2M. 

Discretionary Trusts

The RNRB is not available when a property is left to a discretionary trust. This is because the eventual destination of the property is at the trustees’ discretion. This is the case even if the potential beneficiaries of the trust are children or grandchildren. Although leaving a property to a discretionary trust on death does not use the RNRB, a surviving spouse may be able to claim the unused amount under the transferable NRB rules so long as their property or share of a property is being left to direct descendants.

Where property has been left to a discretionary trust on death but it would be preferable to claim the RNRB, it's possible to unwind the trust by paying the trust assets to the beneficiaries. This appointment under section 144 IHT 1984 must be done within two years of death. The property will then be treated as directly inherited by the beneficiaries and the RNRB can be claimed.

A common estate planning strategy for married couples and civil partners is to include a discretionary trust within the will to accept assets up to the nil rate bands (NRBs) on the first death. This was especially popular prior to the introduction of transferable NRBs. 

Often, rather than transfer a share of the family home into the trust, the trustees may accept an IOU or take a charge against the property to be repaid on the second death. This allowed the surviving spouse to retain outright ownership of the property. It also means that the RNRB can be transferred to the surviving spouse if the property is to pass to direct descendants on the second death.

Inheriting property via a deed of variation

Where a direct descendant becomes entitled to a property following a deed of variation, they are regarded as inheriting it directly from the deceased and so the availability of the RNRB will be preserved. This is so even if the original recipient under the will is not a direct descendant.  

The value of the estate and the taper reduction

The wealthiest estates may not be able to benefit from the RNRB. Estates worth over £2M will start to lose the RNRB, as it will be withdrawn at a rate of £1 for every £2 over £2M. The taper test is applied on each death, including those before 6 April 2017. 

It's the value of the ‘net estate’ that's used when testing against the £2M taper threshold, not the value of the estate for IHT. Broadly, this means the value of everything the deceased owns at time of death (including interests in trusts such as an IPDI or absolute trust), less any liabilities, such as an outstanding mortgage. Therefore, certain exemptions cannot be deducted. These include:

• the spouse exemption for property passing to the spouse
• business property relief, including relief on qualifying holdings of AIM shares 
• agricultural relief
• charitable legacies

Lifetime gifts are also excluded as they'll no longer be owned by the deceased at the time of death This is even if they were made in the seven years immediately before death. This allows gifts right up to the point of death to bring the value used for tapering below the £2M threshold.

While any outstanding debts through mortgages or equity release may reduce the value of the net estate, potentially reinstating the RNRB, it could also affect the amount of RNRB available if they reduce the net value of the home below the maximum RNRB.

From 6 April 2027, most pension benefits will be included in a person's estate for IHT and the value will count towards the RNRB £2M taper threshold from this date.

Transferability of the RNRB

Any unused RNRB can be used on the death of a surviving spouse, with similar rules to those that apply to the main IHT NRB. The estates of widows and widowers will be able to claim any unused RNRB from their deceased spouse or civil partner, even if the first death occurred prior to its introduction. Note that the RNRB cannot be transferred if a couple are unmarried or have not entered into a civil partnership.

There's no restriction on when the first death occurred, but the second death must be after 5 April 2017. The LPRs must claim any transferable RNRB within two years of the second death.

If the first spouse dies before 6 April 2017, it's assumed that they had a full 100% unused RNRB, regardless of whether they had a share in a qualifying property or it passed to a direct descendant. However, the allowance will still be tapered where the first spouse's estate was greater than £2M. Any tapering is applied to a fixed RNRB of £100,000, so there will be no transferable RNRB if the estate on first death exceeds £2.2M.

If the first spouse dies after 5 April 2017, any unused RNRB is transferable unless the estate is large enough for the taper to apply. Again, there's no requirement for the first spouse to have owned a share in a qualifying property or to have passed it to a direct descendant. 

Currently, the maximum RNRB available on second death is £350,000. There's no tapering of the RNRB when the first spouse dies if the estate is less than £2M. However, if the survivor’s estate is more than £2.7M both RNRBs will be lost. This highlights the need for careful IHT planning during their lifetime. The surviving spouse can consider making a lifetime gift to reduce their estate. A gift made within seven years of death is included in a person’s estate for IHT but for tapering the value of gifts made are not part of the net estate. This can be useful to bring the estate below the £2M threshold and make a claim for RNRB.

Will planning – business property relief

If an estate includes business assets which are inherited by the surviving spouse, it could lead to the RNRB (including any transferable RNRB from the first spouse) being tapered on the second death. If the business assets are placed in a discretionary trust, the spouse can be included as a potential beneficiary if needed, but it would keep the business assets outside of the estate for tapering purposes and may help retain the RNRB.

If the surviving spouse is given a qualifying life interest in qualifying business assets, business relief will be available immediately as long as the holding is maintained. However, they will be taken into account when determining the amount of the life tenant’s RNRB. When qualifying business assets are passed to the remaindermen of the trust, a new two year ownership period will start. 

Downsizing provisions

The full RNRB may not be able available if the deceased had downsized prior to their death or if they no longer owned a qualifying property. But the estate may be able to claim a downsizing addition to make up for the amount of RNRB which has been lost.

The downsizing addition is available where:

• the deceased sold, gave away or downsized their home after 7 July 2015,
• the former home would have qualified for the RNRB if it had been retained until death, and
• direct descendants inherit at least part of the estate, provided other assets in the estate are of an equivalent value to the “lost” RNRB.

Where the deceased purchased a lower value property, this new residence must pass to direct descendants for the downsizing addition to apply. If only part of the home is left to the children/grandchildren, then the available RNRB will be calculated on the value of that part.

Generally the downsizing addition will be the amount of the RNRB which has been lost as a result of the disposal of the property. 

When a home is sold or given away, there will be no qualifying property to benefit from the RNRB. However, it's still possible to apply for a downsizing addition.

Where property is gifted rather sold before death, this is a PET for IHT. The recipient may be subject to IHT if the value of the gifted property is greater than the available nil rate bands.

If the home is gifted but the owner still lives there rent free, this is normally a gift with reservation of benefit (GWR). A person’s estate on death includes the value of property subject to a reservation of benefit (GWR). For the purposes of the RNRB the gift is still regarded as a transfer on death and therefore eligible for the RNRB, provided the home goes to direct descendants.

Note that there are circumstances where an owner gifts their home but still lives there on death which are not considered gifts with reservation. For example, where a home is gifted to children and the donor unexpectedly has to move back into the home to be cared for at a later date.

How to claim

The RNRB (including downsizing additions) is claimed using form IHT435. Any transfer of unused RNRB from a deceased spouse or civil partner is claimed using form IHT436.

HMRC provide an online calculator to determine the amount of any additional IHT nil rate bands.