Nil-Rate Band (NRB) and Residence Nil-Rate Band (RNRB) explained

These two inheritance tax (IHT) thresholds – the Nil-Rate Band and the Residence Nil-Rate Band, have the potential to provide significant tax-saving opportunities, by reducing the amount of IHT your estate may owe.

Our expert team of independent financial advisers can help you to do just that and, in this article, we explain how they work.

What is the Nil-Rate Band (NRB) and how much is it?

The NRB is the standard IHT allowance, also referred to as the IHT threshold. It means that part of your estate can be passed on tax free. This also includes certain gifts you make during your lifetime, as long as they are gifted more than seven years before you die. 

At the time of writing, the NRB is £325,000 and will be fixed at that rate until at least April 2028.

Your NRB will be reduced if you die within seven years of any gifts you make that don’t fall within your tax-free gift allowances.

What is the Residence Nil-Rate Band (RNRB)?

The RNRB is currently £175,000 of the value of your primary residence, at the time of writing. This means that the first £175,000 of the value of your main home will not be liable for any IHT to be paid, if you bequeath your home to your children or grandchildren – your ‘direct descendants’.

Eligibility Criteria

To qualify for RNRB, the property must be your main residence at the time of death.

It must be passed on to direct descendants which, as well as children and grandchildren, also include foster children, adopted children and stepchildren, but not nieces and nephews. 

If the value of your estate is above £2 million, or the value of your main home is less than £175,000, or you are not leaving your property to direct descendants, then the RNRB may be reduced or not apply at all.

The RNRB tapering of £2 for every £1 of an estate valued over £2 million, means that an estate valued at £2.35 million may not benefit from RNRB.

Important notes about RNRB

You can’t use a discretionary trust to pass on your home, but certain other types of trust would qualify so check with an expert adviser like the team at PIL Southampton if this could be something you would find useful.

How does the RNRB interact with the standard NRB?

Since April 2023, the RNRB has been set at £175,000 per person. This is an additional tax relief and here is an example of how it would apply.

For an individual’s estate valued at £600,000, the NRB would be £325,000 and the RNRB would be £175,000, giving a total tax-free threshold of £500,000. This leaves £100,000 liable for IHT.

Transferring Nil-Rate Bands to your spouse or civil partner

Both the NRB and the RNRB can usually be transferred between spouses and civil partners when one dies, even many years later. It’s transferred as a percentage rather than a fixed sum, and it needs to be claimed through HMRC following the death of the second partner in the marriage or civil partnership – the transfer doesn’t happen automatically.

An individual can have a maximum of two NRBs and RNRBs, which can be transferred from more than one deceased spouse or civil partner, which means that someone could potentially pass on up to £1 million without incurring IHT.

The Main Residence Nil Rate Band: Calculation Example

With proper planning, combining RNRB with the NRB can have a significant impact on reducing the IHT burden on an estate that includes a main residence being passed on to direct descendants.

An example

Value of estate: £2.3 million

NRB: £325,000

RNRB: £175,000

Tapered RNRB: £75,000 (hypothetical adjustment)

Total tax-free threshold: £325,00 + £75,000 = £400,000

Taxable estate: £2.3 million – £400,000 = £1.9 million

IHT due: 40% on £1.9 million = £760,000

How PIL Southampton can help you 

Our expert, qualified team of expert financial advisers will take the time to get to know your particular circumstances and help you to get the most tax-efficient estate planning strategies in place.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.