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Recommendations for the Residence Nil Rate Band

View profile for Elizabeth Young
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A chapter in the recent Office of Tax Simplification’s (OTS) report, “Simplifying Inheritance Tax”, is dedicated to the Residence Nil Rate Band. This was much anticipated by our Private Client team as it is a complex area of Inheritance Tax law which frequently impacts upon wills and tax planning.

What is the Residence Nil Rate Band?

The Residence Nil Rate Band (RNRB) came into effect in April 2017. It provides an additional allowance for Inheritance Tax on death provided that the home (or the proceeds of sale, subject to the downsizing rules) is inherited by lineal descendants.  Lineal descendants include children, step-children and their issue, subject to a tapering for assets over £2 million.

The RNRB currently stands at £150,000 and is due to increase to £175,000 in April 2020. This sits alongside the main Nil Rate Band (NRB) which currently stands at £325,000. Both the NRB and RNRB are transferable between spouses providing a maximum allowance of £950,000 at present, increasing to £1,000,000 in April 2020. Above this sum (unless any exemptions or reliefs apply), Inheritance Tax at 40% is payable on the balance of the estate.

What does the report say?

One of the key recommendations of the report is for a simplification of the “downsizing rules”. These complex rules enable the RNRB to be claimed where the deceased owned a home but sold it after July 2015, for example, because they moved into permanent residential care. The OTS recommends the rules are simplified so that the RNRB is available so long as the deceased owned a home at some point during their lifetime.

The report acknowledges that the RNRB was one of the issues which generated the biggest public response and specifically refers to complaints of unfairness from those who do not have children or step-children. It points out, however, that if the RNRB were abolished and the NRB increased to £500,000 then, by 2023-24, the Exchequer would be £7.5 billion out of pocket. It goes on to suggest that, in order to retain the current level of Inheritance Tax revenue, then the NRB could only be lifted to £376,000 which, overall, would result in more estates paying Inheritance Tax.

The report also addresses the subject of tapering over £2 million but, rather than making any recommendations for simplification, it recommends that to avoid the loss of the RNRB on second death, the first spouse can leave their share of their home to their children on first death. It acknowledges that the impact of this should be “carefully considered”, however.  This is a veiled reference to the fact that the surviving parent’s occupation of their home is no longer guaranteed and could be jeopardised in the case of a family fall out, divorce or bankruptcy of any of the children. In practice, this type of tax planning is often seen as a “step too far” for many clients.

What does the report not say?

A notable absence from the report’s recommendations is how the RNRB interacts with lifetime trusts and will trusts. For example, something as simple as adding a contingency in wills, deferring a child or grandchild’s inheritance beyond 18, can mean that part or all of the RNRB may be lost, depending on the children’s age at their parent/grandparents’ death. For clients who assume they will benefit from the RNRB, this complicates the process of will-drafting. There is some irony in this, given that the Law Commission has a report outstanding in relation to a 2017 Consultation on simplifying the will-making process.   


Ultimately, the report concludes that the RNRB is a relatively new concept and that it should be given more time before its effectiveness can be evaluated and further recommendations made. To those in the profession, this looks like a convenient side-step of a political issue; it’s worth noting that the Conservative 2010 Manifesto pledge promised to increase the Inheritance Tax threshold to £1 million and, no doubt, the present Government will be reluctant to climb down from this, particularly in light of the impending election.

For now, our advice here at Roythornes remains that the RNRB ought to be considered in all matters of estate planning and will-drafting.