What is the Residence Nil Rate Band (RNRB)?
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My wife and I have been together for 15 years. I have two children from a previous relationship, but we had no children together. We’ve set up our wills so that we leave everything to the surviving partner and then when they die it all gets shared equally between my children. I understand we get special Inheritance Tax treatment by leaving our home to the children, but will that still apply if I die first, as they’re not my wife’s children?
Matthew Hinchliffe of Smith & Pinching responds:
You are right that there is an additional section of Nil Rate Band (where the Inheritance Tax rate charged is zero) that kicks in if you leave your home to “direct descendants” – so children or grandchildren. This is known as the Residence Nil Rate Band (RNRB). The good news is that this also includes stepchildren, so if you were to die first, the RNRB can still be applied to your wife’s estate if she leaves the home to your children.
The rules can also be applied to adopted and fostered children. However, if you die first and your wife later chooses not to leave the house to your children after all, there will be no RNRB applied to the estate on her death.
Let’s look at the actual numbers. Anything you leave to each other as a married couple or civil partners is free of Inheritance Tax, and your unused standard Nil Rate Band (NRB) and RNRB thresholds then pass to the surviving partner. The basic NRB currently stands at £325,000 and the RNRB at a maximum of £175,000 (depending on the value of the home), giving a total combined NRB/RNRB for a couple of up to £1 million, if you follow the pattern above of leaving to each other then on to the children.
However, it’s worth bearing in mind that the RNRB is reduced on a tapered basis for large estates that are worth more than £2 million. The transfer of unused NRB/RNRB doesn’t apply to co-habiting couples who are neither married nor in a civil partnership.
If you and your wife’s combined estate is likely to incur an Inheritance Tax (IHT) liability, please get advice from an Independent Financial Adviser, as there is much that can be done to mitigate a future IHT bill. Measures can include lifetime giving, pension contributions and the use of certain trusts.
Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk