April 2017 saw the introduction of the ‘family home allowance’, formally referred to as the Residence Nil-Rate Band (RNRB), which allows for more of an estate to be bequeathed free of inheritance tax (IHT).
This allowance applies to residential property when it is left to ‘direct descendants’, for example, children, stepchildren and grandchildren, it will not be available on transfers to siblings or other relations. The initial allowance in 2017/18 was £100,000, increasing by £25,000 over the following 3 years to £175,000, with no increases since then. This allowance is available per person, so a married couple may benefit from double the allowance.
In order to qualify, you must own a property, or a share in a property, which you have lived in at some stage (so an investment buy-to-let property would not qualify) and which you intend to leave to your direct descendants on your death, the allowance does not apply on gifts or any other lifetime transfers.
The RNRB is reduced at the rate of £1 for every £2 that an estate is over £2 million (known as a ‘tapered withdrawal’), for example, an estate of £2,100,000 would result in a £50,000 reduction in the RNRB.
The relief will not be available when property has been left in trust, it is important therefore that Wills should be reviewed should you wish to take advantage of this.
Like the Nil Rate Band for inheritance tax, the RNRB can be transferred between spouses if it is not used in whole or in part when the first spouse died, even if the first death occurred before 6th April 2017. With the general inheritance tax Nil Rate Band currently being £325,000 per person, a married couple could potentially leave their loved-ones a combined estate of up to £1million without being liable for IHT.
It is also possible to protect the RNRB if you downsize or sell your family home and move into rented accommodation or a nursing home, although the rules around this are complex.
Rising house prices in many areas of the country mean that thousands more people every year become liable for IHT (see our article ‘The impact of rising property process on inheritance tax’ )
Business owners could also potentially miss out on the full benefit of the allowance. This is because, although most businesses can be passed down free from IHT due to the availability of Business Property Relief, the value of the business will nonetheless be included in the overall value of the estate for RNRB purposes, potentially pushing the total estate over the £2 million mark.
To get the most out of the tax saving effect of the RNRB you should review your Will, or make a Will if you do not already have one.
The conditions for claiming the RNRB and any downsizing allowance can be complicated, and we would urge you to seek professional advice to discuss the options available to you based on your individual circumstances.
For further information please contact our Director of Tax, Aaron Phillips:
Written October 2019 (Updated June 2023)