The 'nil rate band' is the maximum amount which can be passed on death to chargeable beneficiaries (i.e. individuals other than a spouse or charity) without triggering an inheritance tax charge.

Everyone currently has a nil rate band of £325,000 and, from April 2017, there is an additional nil rate band known as 'residence nil rate band' ('RNRB'). This RNRB was publicised under the 2015 Budget as giving married couples/civil partners a total nil rate band of £1,000,000.

The intention behind this measure is to reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge. However, while the aim is simple the application of the legislation is not as straightforward as it may first appear.

In the 2017/18 tax year, the RNRB will be £100,000 per person and this will increase by £25,000 increments until 2021 (see below) when the total RNRB will be £175,000. The maximum nil rate band available per person will therefore be £500,000 or £1,000,000 per married couple/civil partners. After 2021, the RNRB will increase in line with the Consumer Prices Index.

In summary, the RNRB will increase as follows:

  • £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 should be noted that given the conditions to qualify for the RNRB, not everyone will benefit. Whereas the availability of the nil rate band of £325,000 applies broadly, the RNRB only applies to a 'residence' which the deceased must have lived in at some point and which now passes to a direct descendant of the deceased. A property which was bought solely as an investment property (i.e. a buy-to-let) would not qualify and the RNRB could not be used against property of this type.

Furthermore, the RNRB will not be available to individuals who do not have children. For example, if an estate was being left to nieces and nephews the additional relief would not apply, only the standard nil rate band of £325,000 would be applicable. The definition 'direct descendants' include stepchildren, adopted and foster children and grandchildren. The way direct descendants inherit also has to be carefully structured.

The RNRB will be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of this additional RNRB, are passed on death to direct descendants.

In the cases of married couples and civil partners, the RNRB is also 'transferrable' in the same way the standard nil rate band is transferrable. Essentially the unused proportion of nil rate band and RNRB of the first spouse to die, can be transferred and used against the value of the estate of the second spouse to die (bearing in mind, in relation to the RNRB proportion, the rules about residence and direct descendants).

In larger estates, in cases where the net estate is valued at more than £2,000,000, the RNRB is tapered away at the rate of £1 for every £2 over that threshold. Specialist advice should be sought where, on second death, the combined estates are over the £2,000,000 limit but each spouse would on their own would be under this limit. It is also worth bearing in mind that in calculating the value of the estate reliefs such as business property relief are not taken into account.

Clearly the rules are not quite as generous as they seem and there are limitations as to who can benefit from the RNRB and the property which qualifies.