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Can I use the residence nil-rate band to pass down property to grandchildren tax-free?

Many people are left confused by the thought of Inheritance Tax, and rightly so. With as many rules as reliefs, Inheritance Tax legislation is notoriously hard to navigate.

In this blog, therefore, we are going to explore just one aspect of Inheritance Tax – the residence nil-rate band (RNRB) – and more specifically, if it can be used to pass down property to grandchildren tax-free.

The simple answer is yes, it can. But first, we need to understand how Inheritance Tax works.

When someone passes away, Inheritance Tax (also known as IHT) is charged at 40 per cent on the value of their estate which exceeds the IHT threshold – currently, £325,000, or £650,000 when combined with that of a spouse or civil partner.

In the case of spouses or civil partners, if one dies leaving their estate to the survivor of them both, then the survivor will also inherit the IHT threshold, thereby in effect doubling the survivor’s threshold.

If the estate includes a residence or former residence, then it may also be possible to benefit from the residence nil-rate band. This increases the tax-free threshold by £175,000 (or £350,000 when combined with a spouse or civil partner) but only if the residence is left to a direct descendent, broadly defined as your children (including adopted, foster or stepchildren) or grandchildren.

It follows therefore that depending on personal circumstances, to leave £500,000 and up to £1m to grandchildren without an IHT bill.

So, when passing down your estate to grandchildren, it is only the part of the estate which exceeds the Inheritance Tax threshold – and the residence nil-rate band if passing down your home – that is charged. It is possible depending on the circumstances that this threshold might be anything from £325,000 to £1m.

Additional rules

The residence nil-rate band is available when there is an inheritance of the deceased’s residence by a direct descendant and the residence is of a value equal to or more than the residence nil rate band threshold. The residence nil rate band might still be available if a person downsizes or sells their home on or after 8 July 2015, and perhaps goes into long term residence care.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
For the residence nil rate band, inheriting the home only counts if the direct descendants become entitled to the home outright when the owner dies. If the will has a condition that the children or grandchildren have to reach a certain age before they can inherit the home, so that the property is held in a trust, the residence nil rate band will not apply.

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For help and advice with related matters, please get in touch with our later life planning team today.