Maximise the residence nil rate band (RNRB) by making gifts

Last year George Osborne hit the headlines with a new inheritance tax relief which could apply to family homes. The headline was that children would be able to inherit a £1M family home tax-free but unsurprisingly the rules were actually more complicated. In summary:

  1. By 2020/2021 the second spouse or civil partner to die can benefit from up to £350,000 of extra ‘RNRB’ to add to the ‘normal’ nil rate band of £650,000 on second death – which assumes that the first spouse’s nil rate band is transferred to the surviving spouse on death.
  1. This RNRB is eroded at a rate of £1 for every £2 that a person’s estate exceeds £2M. Therefore if a surviving spouse dies with an estate worth £2.7M any nil rate band will be restricted to the ‘normal’ rate of £650,000.

Although gifts made within 7 years before a person’s death will still fall within the UK inheritance tax net (with some tapering for tax on gifts between 3 and 7 years before death), perhaps surprisingly, these gifts are not taken into account when considering any erosion to the RNRB. This can pave the way for certain ‘death bed planning’.



Mrs Hutchinson dies with an estate worth £2M which includes a 50% share in a house worth £500,000. She leaves all of these assets to Mr Hutchinson who ends up with an estate worth £4M. If Mr Hutchinson were to die with a £4M estate then it would not benefit from any RNRB given that the value of the estate exceeds £2.7M. If however he were to gift his children £2M of cash, say, shortly before his death then the full £350,000 RNRB (assuming death after 5 April 2020) would be available and the inheritance tax payable would be £140K less.

This adds an extra dimension to inheritance tax gift planning because in certain circumstances inheritance tax savings will be achieved even when death takes place shortly after the gifts.

Clients should now generally be considering how they will be impacted by the new rules as it is very easy to lose out on benefits if the hurdles in the legislation are not overcome.




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