RNRB: New inheritance tax allowance from 6th April 2017

Residence nil rate band

This April we will see the introduction of the new Residence Nil Rate Band (RNRB) allowance which will apply if an individual dies on or after 6 April 2017. On the face of it, the new allowance looks positive but a little thought is required to ensure that in using the allowance, you do not inadvertently expose your assets to risk.

Current rules and the new RNRB

Currently, everyone has an inheritance tax allowance of £325,000. This has been frozen since 2009 and will not change until at least 2020. On your death, inheritance tax is payable at the rate of 40% on everything over the £325,000 allowance. So if your estate is worth £400,000, the inheritance tax bill would be £30,000 (£400,000 – £325,000 = £75,000 and 40% of £75,000 is £30,000).

The new Residence Nil Rate Band (“RNRB”) effectively increases your inheritance tax threshold if you have a family home that you intend to pass on to a ‘direct descendent’ – e.g. a child or grandchild. Consequently this new allowance will not benefit those who do not have children.

Who is a direct descendant?

A direct descendant, for the purpose of the new RNRB, of a person is:

  • a child, grandchild or other lineal descendant of that person
  • a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

A direct descendant could also be:

  • a child who is, or was at any time, that person’s step-child
  • an adopted child of that person
  • a child who was fostered at any time by that person
  • a child where that person is appointed as a guardian or special guardian for that child when they’re under 18

Your step-children can only be one of your direct descendants if you were married to or in a civil partnership with their mother/father.

Nephews, nieces, siblings and other relatives who aren’t included in the list above are not direct descendants.


The new RNRB allowance is being introduced gradually, as follows:

  • £100,000 in 2017 to 2018 tax year
  • £125,000 in 2018 to 2019 tax year
  • £150,000 in 2019 to 2020 tax year
  • £175,000 in 2020 to 2021 tax year

Inherited allowance

Currently, if you are married or in a civil partnership, any unused part of your inheritance tax allowance is inherited by your spouse/civil partner on your death. Assets left to your spouse or civil partner are free from inheritance tax anyway.

Therefore, that if a couple leaves everything to each other and one dies, the surviving partner inherits their deceased partner’s full inheritance tax allowance of £325,000.

This rule will also apply to the new RNRB allowance.

By the 2020/2021 tax year, this will allow couples to leave up to a million pounds (including a property) to direct descendants (for example, their children) on the death of the second spouse/civil partner, free from Inheritance Tax.


Charlie and Lola have two children. Charlie dies in 2020 and leaves everything to his wife Lola. Because he left everything to his wife, he did not use his £325,000 inheritance tax allowance or his £175,000 RNRB allowance. Lola has her own £325,000 inheritance tax allowance and £175,000 RNRB allowance. The family home is worth £350,000 and Lola also has £650,000 of assets.  Combining her own allowances and those she inherited from Charlie, Lola can leave everything to her two children free from inheritance tax.

Potential pitfalls with the RNRB

The above strategy isn’t without some major concerns. If you leave everything to your partner and they need care after their death, the Local Authority will look at their full estate – including what they inherited from you – when assessing their ability to pay care fees.

  • Those with assets over £23,250 will have to fund the full cost of care themselves.
  • Those with assets between £14,250 and £23,250 have to pay a contribution towards their care.
  • The Local Authority will pay the cost of care fees if a person’s assets are less than £14,250. However, often families want their relative to be cared for in a particular residential care home which may cost more than the Local Authority is willing to pay. The difference will either come from the person’s assets or those of the family.

The cost of care

Care across England and Wales is cheapest in the North West where care fees cost typically £500 a week. The most expensive region for care is the South East where weekly fees are £710 on average. However, a clearer picture of the cost of care is available when a typical 130 week (2.5 year) stay is compared to the average house prices for the region. The following shows the total cost of care as a percentage of the average house value:

  • Wales – 48.10%
  • North West – 42.70%
  • North East – 56%
  • East Midlands – 41%
  • London – 17.9%
  • South East – 29.20%
  • Yorkshire – 45.7%
  • East of England – 32.3%

Source: Royal London in the Telegraph

A huge portion of the family home’s worth can quickly be taken up by the cost of a typical care home stay. Whilst most people are happy to accept that they need to fund their own care, it seems grossly unfair that they should also have to fund the cost of care for their partner, at the expense of their children’s or grandchildren’s inheritance.

So how can people take advantage of the RNRB without exposing their full assets to the risk of care fees?

Using the RNRB and protecting your assets


A solution is to use your Will to leave property on trust to each other for life, then to the children or grandchildren. On your death, your spouse or civil partner will have a life interest in the property/assets, after which it will pass on to whoever you choose.

If the surviving spouse or civil partner then needs care, the Local Authority will not take the amount left in trust into account for the purpose of care fees as it does not belong to your surviving spouse or civil partner absolutely.

Does the RNRB apply in these circumstances? The Government has confirmed that it does, as follows:

“If a home is held in a trust for a person’s benefit before their death, it’ll usually be included in that person’s estate for IHT purposes if the trust gives the person (the beneficiary) the right to use or occupy the property. This right is often called an interest in possession.

This can happen when a person is given a right to live in the family home following the death of their spouse or civil partner. The home is held in a trust for the lifetime of the survivor (or life tenant) and is included in their estate for IHT purposes. When the survivor dies, their estate will be eligible for the RNRB if their direct descendants then inherit their home.”

Source: Inheritance Tax: Residence Nil Rate Band, 8th Nov 2016, Gov.uk

The Government has also helpfully provided a case study of how this works where a couple decide to use a trust in their Will, as follows:

“How to apply the RNRB when a home is put into a trust:

Mr H died in the tax year 2017 to 2018. He left a house valued at £350,000 to his wife in a trust for her benefit whilst she’s alive.

His will directed that the house will go to their children on his wife’s death.

Mrs H dies in tax year 2020 to 2021.

The house, then worth £400,000, passes to the children when she dies.

A claim is made to transfer any unused RNRB from Mr H’s estate. RNRB for Mr H’s estate is nil because he left the house to his wife. RNRB available for transfer is 100% because none’s been used.

You work out the RNRB available on Mrs H’s estate as follows:

  • Mrs H’s own RNRB : £175,000 (maximum RNRB in tax year 2020 to 2021)
  • Plus transferred RNRB : £175,000 (100% x £175,000) – note that this is done by percentage – Mr H did not use 100% of his allowance so Mrs H gets a 100% uplift at current rates
  • Maximum RNRB for Mrs H’s estate £350,000

As the home passing to Mrs H’s children is worth more than the maximum available RNRB of £350,000, Mrs H’s estate qualifies for the full £350,000 RNRB.

Source: Inheritance Tax: residence nil rate band case studies, 8 Nov 2016, Gov.uk

What about discretionary trusts?

Although the Government guidance confirms that a discretionary settlement will not qualify for the RNRB even if all the beneficiaries are lineal descendants, Section 144 of the Inheritance Tax Act 1984 assists us here. This allows the trustees to make a payment to the children within two years of the death which will be read back into the Will (in other words, it will work as if this was the terms of the original Will) and so trustees can retrospectively secure the RNRB for the estate.

If you are concerned about protecting your assets from care fees or keeping them in the family, call us on 0800 788 0500 or email support@aprilking.co.uk. You can also order our free information pack by clicking here.

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