Residence Nil Rate Band (RNRB) and Passing to Minors

In terms of Inheritance Tax, a person can benefit from two separate nil rate bands, provided they meet certain criteria. The first of these is what’s called the standard Nil Rate Band (NRB) currently set at £325,000. The second being the Residential Nil Rate Band (RNRB) which is currently £175,000. These figures are frozen until at least 2031, having been frozen for many years already.

If a person is married at the time of their death, there is the potential that on second death, the second deceased can claim their NRB, their RNRB, the transferable NRB from first death (TNRB) and the transferable residential nil rate band from first death (TRNRB). The allowances are transferred to the second spouse on first death as long as the first spouse to decease did not use their allowance on their death and passed all or the relevant amount of their assets to their spouse.

For a person to qualify for the RNRB they must have owned a residential property which was their principal private residence and, on death, pass to their direct descendants (usually the deceased’s children or grandchildren. The overall combined estate must not exceed £2.25 million (as at this point the RNRB is completely lost due to the taper relief provisions).

Firstly, lets establish who an estate can pass to, to ensure the RNRB can be claimed. As mentioned above, ‘direct descendants’ is the category of people who the property must pass to in order to claim the RNRB. Direct descendant for this purpose is interpreted as being a deceased’s children, grandchildren, remoter issue, any of the aforementioned persons spouse, stepchildren, adopted children or foster children of the deceased and any person whom the deceased had guardianship of while that person was under 18 years of age. Any other person not mentioned above will not qualify to apply the RNRB.

It must also be noted that unmarried couples do not benefit from the RNRB nor can a partner’s children, as this does not qualify as being ‘closely inherited’. This is regardless even where an unmarried couple cohabit or own a property together.

It is widely known that if a person names their grandchildren as beneficiaries that they are entitled to also claim the RNRB, but only if they leave the attaining age at 18. Specifying any other age means there is a possibility that they may lose eligibility of RNRB on that portion. However, it’s important to realise that this also applies when applying an attaining age to the children. For example: If a person leaves their estate to their children on attaining 21 years of age, it is possible that they could lose the benefit of the RNRB.

A vast majority of clients wish not to pass their estate over before their child or children attain a higher age, which is understandable and can still be achieved without losing the RNRB. This can be done by gifting the main residential property to direct descendants on attaining 18 years of age but then passing the remaining assets at a higher age, enabling them to still benefit from the RNRB provided all other criteria is met.

If a client was to include an attainment age above 18 for their children to benefit, for instance they are to attain at 21 years but when the Will comes into effect upon death the children are over 21 years of age then the RNRB can still be used.

Another important point is to establish if a person is entitled to claim the RNRB even though they may no longer own a property. A person can still benefit from the RNRB if they do not own a property at the time of death but if they did own a property that was their main residence previously (on or after 8 July 2015). If this criterion is met, you are able to claim the RNRB from having a former residential interest. This also applies if the person downsized properties.

For example: If you own current property worth £100,000, you will only be able to use £100,000 RNRB, however if you owned a higher value property on or after 8 July 2015, for instance a property worth £350,000, you could uphold the full RNRB of £175,000 per person.

It is important to remember that whilst the NRB is automatically applied to all people, the RNRB must be claimed by the deceased’s personal representatives. It can put a heavy burden on executors and administrators to know that this allowance can be claimed and when it can be claimed.

Finally, the RNRB can be claimed even if a property is to be held in certain trusts. Trusts which can retain the eligibility for the RNRB (provided the final beneficiaries of the Trust are direct descendants) are disabled persons trusts, vulnerable persons trusts and life interest trusts. In regard to life interest trusts the final beneficiaries must be direct descendants of the life tenant to enable the RNRB to be applicable.

Importantly, discretionary trusts do not allow the RNRB to be used regardless of whether the beneficiaries are direct descendants or not.

What Next?

Estate planning and specifically Inheritance Tax planning can be a complex business. It’s important to get things right, first time, as mistakes in this area can be costly, sometimes running into hundreds of thousands of pounds.

Get in touch with one of our later life specialist advisers for an initial complimentary chat to ensure you are on the right track!

Call 0117 3636 212 or email office@haroldstephens.co.uk