Introduction
The threshold (nil rate band (NRB)) for Inheritance Tax (IHT) is £325,000. From 6 April 2017, there’ll be an additional residence nil rate band (RNRB) for an estate if an individual leaves a home to their children or other direct descendants when that individual dies. This will be:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
It will then increase in line with the Consumer Prices Index (CPI) from 2021 to 2022.
Any unused RNRB can be transferred to a surviving spouse or civil partner.
How to calculate and apply the RNRB
Case study 1: how to apply the RNRB and NRB to an estate
Mr A dies in the tax year 2020 to 2021 and leaves a home worth £300,000, and other assets worth £190,000 to his children.
The maximum available RNRB in tax year 2020 to 2021 is £175,000.
| RNRB for the estate | £175,000 (the lower of £300,000 and £175,000) |
| NRB | £325,000 |
| estate value | £490,000 |
| less RNRB | – £175,000 |
| remaining value | £315,000 |
| less NRB | – £315,000 |
| value that Inheritance Tax (IHT) is due on | £0 |
In this case the whole of the RNRB has been used up, but £10,000 out of the available NRB of £325,000 is unused and can be transferred to Mr A’s wife.
Case study 2: how to apply the RNRB if the home is worth less than the maximum RNRB
Mrs B dies in the tax year 2020 to 2021 leaving a flat worth £100,000, and other assets of £400,000 to her son. She leaves the rest of her assets of £500,000 to her husband; these are exempt for IHT purposes.
The maximum available RNRB in the tax year 2020 to 2021 is £175,000.
| RNRB for the estate | £100,000 (the lower of £100,000 and £175,000 |
| NRB | £325,000 |
| estate value | £500,000 (the £500,000 left to the husband is exempt) |
| less RNRB | – £100,000 |
| remaining value | £400,000 |
| less NRB | – £325,000 |
| value that IHT is due on | £75,000 |
The maximum possible RNRB for this estate was £175,000, but the value of the flat left to the son is only £100,000. So only £100,000 of RNRB has been used.
The RNRB that hasn’t been used (£75,000) is available for transfer to the husband’s estate. There’s no unused NRB to transfer as this was used in full.
Case study 3: how to apply the NRB to lifetime transfers
Ms C dies in tax year 2020 to 2021. She leaves a house worth £200,000 and other assets worth £250,000 to her daughter.
She’d made gifts before of £100,000 to her nephew within 7 years of her death.
The maximum available RNRB in tax year 2020 to 2021 is £175,000.
| RNRB for the estate | £175,000 (the lower of £500,000 and £175,000) |
| NRB | £325,000 |
Firstly, the NRB of £325,000 is applied against the lifetime gifts of £100,000:
| chargeable lifetime gifts add up to | £100,000 |
| less NRB | – £100,000 |
| value that IHT is due on | £0 |
This leaves £225,000 of NRB to use against the estate on death.
| estate value | £450,000 |
| less RNRB | – £175,000 |
| remaining value | £275,000 |
| less remaining NRB | – £225,000 |
| value that IHT is due on | £50,000 |
Case study 4: how to use the NRB and RNRB for lifetime transfers
Mr D dies in tax year 2020 to 2021 leaving a house worth £500,000, and other assets worth £250,000, to his granddaughter.
He’d previously made gifts of £700,000 to his other grandchildren and nephew within 7 years of his death. The maximum available RNRB in 2020 to 2021 is £175,000.
| RNRB for the estate | £175,000 (the lower of £500,000 and £175,000) |
| NRB | £325,000 |
Firstly, the NRB of £325,000 is applied against the lifetime gifts of £700,000:
| chargeable lifetime gifts | £700,000 |
| less NRB | – £325,000 |
| value of gifts that IHT is due on | £375,000 |
The chargeable lifetime gifts use up all of the NRB. So £375,000 of the gifts are subject to IHT.
But the RNRB is still available to set against the estate value:
| estate value | £750,000 |
| less RNRB | – £175,000 |
| value of estate that IHT is due on | £575,000 |
Transfer of any unused RNRB
Case study 5: how the RNRB is transferred
Mr E died in 2015 and left his entire estate to his wife. This was before RNRB was available.
On Mr E’s death the RNRB couldn’t have been used so 100% is available to transfer to his wife’s estate.
Mrs E dies on 30 July 2019 and leaves all her estate, including a home worth £400,000 to her daughter.
On Mrs E’s death in the tax year 2019 to 2020, the maximum available RNRB is £150,000.
Her executor makes a claim to transfer the unused RNRB from her late husband.
So the total available RNRB for Mrs E’s estate will be £300,000 (£150,000 + (100% x £150,000)).
The home
Case study 6: how to apply the RNRB when a share of the home is left to direct descendants
Ms F dies in tax year 2020 to 2021. Her estate includes a home valued at £500,000.
In her will she leaves half of the property to her step-son and half to her nephew.
You work out the RNRB based on the value of the property left to the step-son (£250,000). But, the actual RNRB for the estate is restricted to £175,000. This is the lower of the maximum available RNRB for tax year 2020 to 2021 (£175,000) and value of the half share of the home (£250,000).
You get the same answer if the home was part of the residue on Ms F’s estate and the residue was left equally to her step-son and nephew.
Inheriting the home
Case study 7: how to apply the RNRB when the home is sold after a death
Mrs G died in tax year 2019 to 2020 leaving her house, valued at £500,000, to her 3 grandchildren as part of the residue of her estate. The maximum available RNRB in tax year 2019 to 2020 is £150,000.
The 3 grandchildren don’t want to keep the property jointly. Mrs G’s personal representatives sell the property and distribute the sale proceeds between the 3 grandchildren.
As the home passes to the grandchildren under the terms of Mrs G’s will, RNRB of £150,000 will be available.
The fact that the home was sold as part of the administration of the estate doesn’t affect the availability of RNRB.
Trusts
Case study 8: how to apply the RNRB when a home is put into a trust
Mr H died in the tax year 2017 to 2018. He left a house valued at £350,000 to his wife in a trust for her benefit whilst she’s alive.
His will directed that the house will go to their children on his wife’s death.
Mrs H dies in tax year 2020 to 2021.
The house, then worth £400,000, passes to the children when she dies.
A claim is made to transfer any unused RNRB from Mr H’s estate. RNRB for Mr H’s estate is nil because he left the house to his wife. RNRB available for transfer is 100% because none’s been used.
You work out the RNRB available on Mrs H’s estate as follows:
| Mrs H’s own RNRB | £175,000 (maximum RNRB in tax year 2020 to 2021) |
| plus transferred RNRB | £175,000 (100% x £175,000) |
| maximum RNRB for Mrs H’s estate | £350,000 |
As the home passing to Mrs H’s children is worth more than the maximum available RNRB of £350,000, Mrs H’s estate qualifies for the full £350,000 RNRB.
Tapering away the RNRB
Case study 9: how the RNRB is tapered away
Mr I dies in the tax year 2018 to 2019 leaving an estate valued at £2,100,000 to his children. This includes a home worth £450,000.
The maximum RNRB in the tax year 2018 to 2019 is £125,000.
The estate exceeds the taper threshold of £2 million by £100,000.
The RNRB is tapered away by £1 for each £2 that the estate exceeds the taper threshold. So the RNRB is reduced by £50,000:
| RNRB | £125,000 (lower of £450,000 and £125,000) |
| less amount of taper | – £50,000 |
| net RNRB for the estate | £75,000 |
If the value of Mr I’s estate was £2,250,000 or more, the RNRB of £125,000 would be tapered away completely.
Case study 10: how the RNRB available for transfer is reduced by tapering
Mr J dies in the tax year 2018 to 2019 leaving an estate valued at £2,100,000.
He leaves his £450,000 home to his wife, and everything else to his children.
The maximum RNRB in the tax year 2018 to 2019 is £125,000. But as Mr J’s children don’t inherit the home, his estate can’t use any RNRB.
Without the effect of tapering, Mr J would have unused RNRB of £125,000.
(£125,000 less £50,000).
But Mr J’s estate is worth more than the taper threshold of £2 million by £100,000.
The RNRB available to Mr J’s estate is tapered by £1 for each £2 that the estate is worth more than the taper threshold, so the RNRB is reduced by £50,000. If Mr J’s home had been left to his children, the RNRB would’ve been £75,000. So the amount of his unused RNRB is £75,000.
The percentage of unused RNRB in Mr J’s estate is:
| unused RNRB | £75,000 |
| divided by maximum RNRB in the tax year 2018 to 2019 | ÷ £125,000 |
| percentage of unused RNRB | 60% |
Mrs J dies in tax year 2020 to 2021, when the maximum RNRB is £175,000.
She has an estate of £1.8 million, including her home worth £500,000. She leaves all of this to her children.
The amount of RNRB available to transfer to Mrs J’s estate is:
| maximum RNRB in tax year 2020 to 2021 | £175,000 |
| multiplied by unused percentage | x 60% |
| RNRB to transfer | £105,000 |
So Mrs J’s estate qualifies for £175,000 RNRB based on her estate, plus a further £105,000 transferred RNRB from the estate of Mr J, to give a total RNRB of £280,000.
Downsizing: the lost RNRB
Case study 11: how to calculate the lost RNRB
Mrs K, a widow, sold a home worth £195,000 in June 2018. The maximum RNRB when the home was sold in the tax year 2018 to 2019 is £125,000.
She dies in August 2020 with no home in her estate.
The maximum RNRB when Mrs K dies in tax year 2020 to 2021 is £175,000.
Mrs K’s estate is also entitled to transferred RNRB of £175,000.
To calculate the lost RNRB:
Step 1. The maximum RNRB when the home was sold was £125,000. Mrs K’s estate is also entitled to transferred RNRB of £175,000 when she dies. So the total RNRB that could have been available when the home was sold is £300,000 (£125,000 + £175,000).
Step 2. The home was worth £195,000 when it was sold. You divide this by the value at step 1 (£300,000) to give a percentage of 65%.
Step 3. There’s no home in the estate at the date of death, so the percentage is 0%.
Step 4. Taking 0% from 65% gives a percentage of 65%.
Step 5. When Mrs K dies, the maximum RNRB is £175,000. Her estate is also entitled to transferred RNRB of £175,000, so the maximum RNRB for Mrs K’s estate is £350,000. The ‘lost’ RNRB is £227,500 (65% of £350,000).
Although the lost RNRB is £227,500, the amount of the downsizing addition actually available to Mrs K’s estate depends on the value of any other assets that are left to Mrs K’s direct descendants.
Downsizing to a less valuable home
Case study 12: when a downsizing addition wouldn’t be due
Mrs L downsized in 2018 from a house worth £450,000 to a bungalow. The maximum RNRB in the tax year 2018 to 2019 is £125,000.
When Mrs L dies in the tax year 2020 to 2021 her estate is worth £700,000. She leaves the bungalow worth £200,000 to her sister.
She leaves other assets worth £500,000 to her children.
The maximum RNRB due in tax year 2020 to 2021 is £175,000.
There’s no entitlement to transferred RNRB on Mrs L’s death.
Step 1. The maximum RNRB when the house was sold was £125,000.
Step 2. The house was worth £450,000 when it was sold. Divide this by the figure at step 1 to give a percentage of 360%. But as the value of the house is more than the figure at step 1, the percentage is limited to 100%.
Step 3. The bungalow at the date of death is worth £200,000. Divide this by the maximum RNRB available at death (£175,000). This would be 114.3%, but again is limited to 100%.
Step 4. Take away the percentage at step 3 (100%) from the percentage at step 2 (100%). This gives a percentage of 0%.
Step 5. Multiply the maximum RNRB at death (£175,000) by the percentage at step 4 (0%), to give a total of lost RNRB of £Nil.
As the percentage at step 4 is 0%, there’s no lost RNRB and there can be no downsizing addition.
Case study 13: how to work out the downsizing addition and RNRB
In May 2018 Mr M downsized from a large house worth £500,000 to a small flat. The maximum RNRB in the tax year 2018 to 2019 is £125,000.
Mr M dies in September 2020. He leaves the flat worth £105,000 to his son, and the rest of his estate worth £200,000 to his 2 daughters.
The maximum RNRB due in tax year 2020 to 2021 is £175,000.
There’s no entitlement to transferred RNRB on Mr M’s death.
Step 1. The maximum RNRB at the date of downsizing was £125,000.
Step 2. The house was worth £500,000 when it was sold. Divide this by the figure at step 1, but limit the percentage to 100%.
Step 3. The flat is worth £105,000 when Mr M dies. Divide this by the maximum RNRB available at death (£175,000). This gives a percentage of 60%.
Step 4. Take away the percentage at step 3 (60%) from the percentage at step 2 (100%) to give a percentage of 40%.
Step 5. Multiply the maximum RNRB at death (£175,000) by the percentage at step 4 (40%) to give a total of lost RNRB of £70,000.
The actual amount of the downsizing addition depends on the value of other assets that are left to Mr M’s children.
As Mr M leaves more than £70,000 of other assets to his daughters, the downsizing addition of £70,000 is added to the RNRB due for the flat of £105,000 left to his son. This gives a total RNRB for the estate of £175,000.
If instead Mr M had left the flat to his son, some assets worth £50,000 to his daughters, and the rest of his estate to his wife, the downsizing addition would be restricted to £50,000. This is because that’s the value of other assets he left to his daughters.
The total RNRB in that case would be £155,000 (£105,000 + £50,000).
Case study 14: how to work out the downsizing addition and RNRB where only a part of the home is left to direct descendants
Mr N downsized in February 2019 from a house worth £400,000 to a bungalow. The maximum RNRB in the tax year 2018 to 2019 is £125,000.
When Mr N’s dies in September 2020, he leaves the bungalow, worth £105,000, in equal shares to his wife and son.
He leaves the other assets in his estate worth £150,000 to his daughter.
The maximum RNRB due in tax year 2020 to 2021 is £175,000.
There’s no entitlement to transferred RNRB on Mr N’s death.
Step 1. The maximum RNRB at the date of downsizing was £125,000.
Step 2. The house was worth £400,000 when it was sold. Divide this by the figure at step 1, but limit the percentage to 100%.
Step 3. When Mr N dies, the bungalow is worth £105,000. Divide this by the maximum RNRB available at death (£175,000). This gives a percentage of 60%.
Step 4. Take away the percentage at step 3 (60%) from the percentage at step 2 (100%). This gives a percentage of 40%.
Step 5. Multiply the maximum RNRB at death (£175,00) by the percentage at step 4 (40%), to give a total of lost RNRB of £70,000.
Mr N only leaves half of the bungalow to his son. So you reduce the RNRB due for that home £52,500 (50% of £105,000).
As Mr N leaves other assets of £150,000 to his daughter, the downsizing addition is £70,000 (the lower of the lost RNRB of £70,000 and £150,000).
You add this to the RNRB due for the bungalow of £52,500, to give a total RNRB of £122,500 (£52,500 + £70,000).
The maximum available RNRB is £175,000, but Mr N’s estate can only use £122,500. So there’s unused RNRB of £52,500 available to be transferred to Mrs N’s estate.
If the assets left to the daughter were worth only £20,000, the downsizing addition would be restricted to £20,000. So the total RNRB for the estate would be £72,500 (£52,500 + £20,000).
There’d be unused RNRB of £102,500 available for transfer.
Case study 15: how to work out the downsizing addition where downsizing occurs before 6 April 2017
Mr and Mrs O downsized in March 2016 from a house they owned jointly, worth £300,000, to an apartment. As the move happened before 6 April 2017, HMRC treat the maximum RNRB in March 2016 as being £100,000.
When Mrs O dies in December 2019, she leaves her half share of the apartment, worth £105,000, to her husband. She leaves other assets in her estate worth £80,000 to her step-daughter.
The maximum RNRB due in tax year 2019 to 2020 is £150,000.
There’s no entitlement to transferred RNRB on Mrs O’s death.
Step 1. The maximum RNRB at the date of sale is treated as being £100,000 because the downsizing happens before 6 April 2017.
Step 2. The house was worth £400,000 when it was sold. Divide this by the figure at step 1, but limit the percentage to 100%.
Step 3. The apartment is worth £105,000 when Mrs O dies. Divide this by the maximum RNRB available at death (£150,000) to give a percentage of 70%.
Step 4. Take away the percentage at step 3 (70%) from the percentage at step 2 (100%) to give a percentage of 30%.
Step 5. Multiply the maximum RNRB at death (£150,000) by the percentage at step 4 (30%) to give a total of lost RNRB of £45,000.
Because the apartment was left to Mrs O’s husband there’s no RNRB due for the share in that home.
The downsizing addition is the lower of the lost RNRB (£45,000) or the amount of other assets left to the step-daughter (£80,000). So the downsizing addition is £45,000 in this case.
The total RNRB for the estate is therefore £45,000 due to the downsizing addition.
Mrs O’s estate had a maximum available RNRB of £150,000, but it can only use £45,000. So there’s unused RNRB of £105,000 available to be transferred to Mr O’s estate.
If the value of the assets left to the daughter had only been £10,000, the downsizing addition would be reduced to £10,000. So the total RNRB for the estate would be £10,000. In that case the unused RNRB available for transfer would be £140,000.
Disposing of a home
Case study 16: how to work out the downsizing addition if there’s no home in the estate
Mrs P sold her home for £285,000 in October 2018 to go into residential care. The maximum RNRB in the tax year 2018 to 2019 is £125,000.
She dies in March 2021 with an estate worth £500,000.
She leaves half of her estate to her son and half to her nephew.
The maximum RNRB due in tax year 2020 to 2021 is £175,000.
There’s no entitlement to transferred RNRB on Mrs P’s death.
Step 1. The maximum RNRB at the date of sale was £125,000.
Step 2. The house was sold for £285,000. Divide this by the figure at step 1, but limit the percentage to 100%.
Step 3. There’s no home in the estate at death so the percentage here is 0%.
Step 4. Take away the percentage at step 3 (0%) from the percentage at step 2 (100%). The percentage at step 2 is unaltered and remains 100%.
Step 5. Multiply the maximum RNRB at death (£175,000) by 100%, so the total lost RNRB is £175,000.
The value of the home at the time of the sale is more than the maximum RNRB at that time so the whole of the RNRB has been lost.
Before she downsized, Mrs P’s estate could have qualified for the maximum RNRB at that time. When Mrs P dies, the lost RNRB as a result of the downsizing is therefore £175,000.
The downsizing addition is the lower of the value of other assets that are left to a direct descendant and the lost RNRB.
As Mrs P leaves £250,000 of other assets to her son, a downsizing addition of £175,000 is due.
If instead Mrs P had only left £100,000 to her son and the rest of her estate to her nephew, the downsizing addition would be restricted to £100,000.
Case study 17: how to work out the downsizing addition if the home is worth less than the maximum available RNRB
Mr Q had a flat that he sold for £90,000 in May 2019. He moved in with his daughter. The maximum RNRB in the tax year 2019 to 2020 is £150,000.
Mr Q dies in January 2021 with an estate worth £600,000. He leaves all of it to his daughter.
The maximum RNRB due in tax year 2020 to 2021 is £175,000.
There’s no entitlement to transferred RNRB on Mr Q’s death.
Step 1. The maximum RNRB at the date of sale was £150,000.
Step 2. The flat was worth £90,000 when it was sold. Divide this by the figure at step 1, to give a percentage of 60%.
Step 3. There’s no home in the estate at death so the percentage here is 0%.
Step 4. Take away the percentage at step 3 (0%) from the percentage at step 2 (60%). The percentage at step 2 is unaltered and remains 60%.
Step 5. Multiply the maximum RNRB at death (£175,000) by 60%, so the total lost RNRB is £105,000.
The actual amount of the downsizing addition is the lower of the lost RNRB (£105,000) and the value of other assets that are left to a direct descendant.
As Mr Q leaves £600,000 of other assets to his daughter, a downsizing addition of £105,000 is due.
Downsizing where there’s transferred RNRB
Case study 18: how to work out the downsizing addition when the RNRB has been transferred
Mrs R sold her home for £285,000 in October 2018 to go into residential care. The maximum RNRB in the tax year 2018 to 2019 is £125,000.
She dies in March 2021 with an estate worth £500,000.
She leaves half of her estate to her son and half to her nephew. The maximum RNRB due in tax year 2020 to 2021 is £175,000.
Mrs R’s estate is entitled to transferred RNRB of £175,000.
Step 1. The maximum RNRB at the date of sale was £125,000. There’s also an entitlement to transferred RNRB of £175,000 at the date of death. So the total value at step 1 is £300,000 (£125,000 + £175,000).
Step 2. The house was sold for £285,000. Divide this by the figure at step 1 to give a percentage of 95%.
Step 3. There’s no home in the estate at death so the percentage here is 0%.
Step 4. Deduct the percentage at step 3 (0%) from the percentage at step 2 (95%) So the percentage at step 2 is unaltered and remains as 95%.
Step 5. The maximum RNRB at death is £175,000. There’s also an entitlement to transferred RNRB of £175,000, so the maximum RNRB for Mrs R’s estate is £350,000. Multiply this by 95% to give total lost RNRB of £332,500.
The actual amount of the downsizing addition is the lower of the value of other assets left to a direct descendant and the lost RNRB. As she left £250,000 of other assets to her son, her estate is due a downsizing addition of £250,000.
Source: HMRC