Residence Nil Rate Band (RNRB): Planning

9 min read 1 Mar 22

By The Technical Team

Gifting can deliver an effective rate of relief of up to 60% for estates over £2m
Beware of a ‘combined’ estate on second death exceeding £2m
Be careful when leaving the home in trust for minors where the gifts are age contingent
Leaving the home to a discretionary will trust can provide a gateway to crystallising RNRB
Where a mortgage restricts the availability of RNRB, planning might assist

Gifting to reduce the estate below £2m

When the £2m Taper Threshold (TT) is exceeded, the RNRB is reduced by £1 for every £2 over that limit. Tapering can reduce the RNRB to zero.

In Spring Budget 2021 it was announced that the IHT thresholds at 2020/21 levels will be maintained up to and including 2025/26. This maintains the NRB at £325,000, the RNRB at £175,000 and the RNRB taper starting at £2m

The TT can restrict not only the amount of RNRB available on the death, but also the amount of unused RNRB that is available to transfer to a surviving spouse or civil partner.

Based on a RNRB figure of £175,000, there will then be no RNRB if the estate exceeds £2.35m or £2.7m including the brought forward allowance if appropriate

The RNRB facts article explains how the value of the estate is calculated. For planning purposes, it is important to note that the value excludes the value of any CLTs (chargeable lifetime transfers) or failed PETs (potentially exempt transfers)because property which has been gifted is not part of the estate immediately before death.

Example of lump sum gift where individual does not survive for 7 years

In 2022/23 Peter, who has never been married has an estate valued at £2,350,000
This includes a home worth £500,000 which he is planning on leaving to his daughter
His estate exceeds the TT by £350,000
If he dies, the default RNRB of £175,000 will be subject to taper
The adjusted RNRB will be £0
Assume that Peter makes a ‘deathbed’ gift of £350,000 and then dies in 2022/23
His estate for RNRB purposes will be £2,000,000
The default RNRB of £175,000 will then apply. IHT saved @ 40% = £70,000
Effective rate of tax relief on the gift is 20% (£70,000/£350,000)

Example of lump sum gift where individual survives for at least 7 years

Rose, who has never been married has an estate valued at £2,350,000
This includes a home worth £500,000 which she is planning on leaving to her son
Her estate exceeds the TT by £350,000
If she dies in 2022/23, the default RNRB of £175,000 will be subject to taper
The adjusted RNRB will be £0
Assume that Rose made a PET of £350,000 at least 7 years before her death
Her estate for RNRB purposes will be £2,000,000
The default RNRB of £175,000 will then apply. IHT saved @ 40% = £70,000
The PET has become exempt meaning that IHT of £140,000 is also saved (40% x £350,000)
Effective rate of tax relief on the gift is 60% (i.e. £70,000+£140,000 = £210,000/£350,000)

Example of married couple where first death estate exceeds £2m

Susan and Tom both have children, and recently got married
Tom has an estate of £2.35m including a £500,000 house. Susan has very modest assets
Assume Tom dies in 2022/23 leaving his estate to Susan
On Susan’s later death, there will be no brought forward RNRB available due to taper
Tom might consider lifetime gifting to resolve this

Beware also the problem where the estate of the first to die is below £2m but all assets are left to the surviving spouse/civil partner causing a bunching effect on second death with the combined estate then breaching the £2m limit. Planning while both partners are alive, or even after first death may alleviate this problem. This might involve:

Creating a NRB discretionary will trust on first death rather than 100% to survivor
Making a gift which crystallises RNRB on first death (may need to sever joint tenancy)
Lifetime gifting

Care should be taken though with the RNRB gift on first death in case it impacts on the surviving spouse wishing to remain resident in the family home.

Deed of Variation

A beneficiary of a will can execute a Deed of Variation within 2 years of the date of death. Technically the will is not being varied as such, but instead the beneficiary can redirect some or all of the inheritance and for IHT purposes it is treated as if it had been carried out by the deceased. Therefore, the gift by the beneficiary is not subject to the 7 year rule. With that in mind, consider the following.

Alice and Ben are an unmarried couple. When Alice dies, she leaves her home to Ben and because he is not a direct descendant then no RNRB will be available. If however Ben executes a Deed of variation, then he can ‘vary away’ the home to Alice’s granddaughter, for example, who is a direct descendant. The RNRB will then be available.

Discretionary will trusts

Where the deceased wishes to give beneficiaries maximum flexibility in the way in which the estate is distributed, it is not uncommon to see the whole estate, or at least an amount equivalent to the NRB, left to a discretionary trust. If the home, or a share of it is left to a discretionary will trust then there will be no RNRB available as there is no one ‘closely inheriting’.

If however within 2 years of death there is an appointment of the trust assets by the trustees to a direct descendant, then it would be treated for IHT purposes as if the assets had been left to the direct descendant outright (S144 IHTA 1984). In that event, the RNRB would be available as the direct descendant is treated as if he/she had inherited the property on death.

Age contingent gifts

When the home becomes trust property after the deceased’s death, then be careful when gifts to children and grandchildren are age contingent.

Where a home or a share of one is being left to children who must attain a specified age then there will be no RNRB unless they have either attained that age at date of death, it is a trust for a bereaved minor, or it is an 18-25 trust.

A trust for a ‘bereaved minor’ refers to a trust for the benefit of a person under 18, at least one of whose parents has died where the trust is created in certain circumstances, typically under the will of a deceased parent of the bereaved minor, or under a statutory trust arising on intestacy. Where the trust arises under intestacy rules then the trust will automatically qualify. Where it arises under the will of a deceased parent of the bereaved minor then the trust needs to satisfy certain conditions.

An 18-25 trust is a trust for the benefit of a person under the age of 25, at least one of whose parents has died. The trust is typically established under the will of a deceased parent of the minor, and again, certain conditions must be met.

The position with grandchildren is therefore even more restrictive since a grandparent in their will cannot create a trust for a bereaved minor, or an 18-25 trust. Therefore, the RNRB will only be available under the grandparent’s will if the grandchild has attained the specified age at date of death.

Given that age contingent gifts to grandchildren in the will can be problematic from a RNRB perspective, then is there anything else advisers should be aware of? Yes. If a grandparent leaves the home (or a share of it) in their will to a grandchild who has reached 18 at time of death, then he/she will have a right to income under S31 of the Trustee Act 1925 (assuming that hasn’t been excluded). That would mean the grandchild has an Immediate Post Death Interest (IPDI) meaning that the share has been ‘closely inherited’.

Obtaining three RNRBs

Example of how three RNRBs can be achieved (I)

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan
Gilbert’s RNRB was unused as he died before 6 April 2017
Harriet’s estate is entitled to a 100% brought forward allowance from Gilbert
Harriet dies and leaves her whole estate to Ivan
On Ivan’s death, Gilbert’s RNRB is wasted as Ivan was not married to Gilbert
On Ivan’s death he leaves everything to his son and crystallises a double RNRB
In summary, two RNRBs have been used

Solution?

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan
Gilbert’s RNRB was unused as he died before 6 April 2017
Harriet’s estate is entitled to a 100% brought forward allowance from Gilbert
Harriet dies and crystallises her double RNRB by gifting to her daughter
On Ivan’s death, he leaves everything to his son and crystallises his RNRB
In summary, three RNRBs have been used

Now let’s change the circumstances and assume that Ivan dies before Harriet.

Example of how three NRBs can be achieved (II)

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan
Gilbert’s RNRB was unused as he died before 6 April 2017
Harriet’s estate is entitled to a 100% brought forward allowance from Gilbert
Ivan dies and also leaves his whole estate to Harriet
On Harriet’s death, she leaves everything to her daughter
One RNRB is wasted as the maximum uplift on Harriet’s death is 100%
In summary, two RNRBs have been used

Solution?

Gilbert died in 2007/08 leaving everything to his spouse Harriet who later married Ivan
Gilbert’s RNRB was unused as he died before 6 April 2017
Harriet’s estate is entitled to a 100% brought forward allowance from Gilbert
Ivan dies and crystallises his RNRB by making a gift to his son
On Harriet’s death, she leaves everything to daughter and crystallises her double RNRB
In summary, three RNRBs have been used

Mortgages

As explained in our RNRB facts article, the value of the RNRB for an estate will be the lower of the net value of the interest in the home (after deducting any liabilities such a mortgage) or the maximum amount of the band.

Example of increasing the equity on the home

Stephen is a widower following the death of his wife in 2010
He has a £700,000 home with a £450,000 mortgage secured against it. Other assets of £1m
He dies in 2022/23 leaving his entire estate to his children
The standard RNRB is £350,000, but the actual RNRB would be restricted to £250,000
If Stephen had reduced his mortgage by £100,000, the RNRB available would be £350,000
This would give rise to an IHT saving of £40,000 (40% x £100,000)

Alternatively, perhaps Stephen could restructure the debt so that it is secured against an asset other than his home?

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