Understanding Inheritance Tax Allowances: NRB vs RNRB

Inheritance Tax (IHT) is a concern for many families across the UK. With rising property values, more estates than ever are at risk of being taxed. For example, 2022/2023 the Treasury collected £6.7Billion from families in the UK through IHT, a largely avoidable Tax for many families, and understanding your inheritance tax allowances is the first step.

Fortunately, the government provides inheritance tax allowances that can reduce or even eliminate your IHT liability. The key to using them effectively is understanding how they work.

In this article, we’ll break down:

• The Nil-Rate Band (NRB)
• The Residence Nil-Rate Band (RNRB)
• How to calculate what you may be entitled to
• Examples to help you understand your position

What Is the Nil-Rate Band (NRB)?

The Nil-Rate Band is the basic IHT allowance available to everyone. Nil-Rate Band = The amount your estate can leave before Inheritance Tax is paid. Think of your personal allowance with income tax.

• Current threshold: £325,000 per person
• Married couples / civil partners: Can combine allowances to leave up to £650,000 tax-free.

Anything in your estate above this threshold is generally taxed at 40%.

Residence Nil-Rate Band (RNRB)

The RNRB is an additional allowance introduced to help families pass on the family home without incurring as much IHT. However, there can be some exemptions.

• Current threshold: Up to £175,000 per person
• Only applies when: You pass your home (or part of it) to direct descendants (e.g., children, grandchildren)
• Combined with NRB: Married couples can potentially pass on up to £1 million tax-free (£650,000 NRB + £350,000 RNRB) This means many families around Macclesfield and Cheshire have nothing to worry about.

Important: You Can’t Claim More RNRB Than the Home Is Worth

One common misconception is that everyone automatically gets the full RNRB (£175,000 or £350,000 per couple). While this is true for many families, you will see that not all families do, and the result of not understanding the inheritance tax allowances correctly can cost thousands.

This can be a very expensive mistake, costing families many thousands in unexpected Inheritance Tax.

However, the RNRB is capped at the value of the property (or share of it) which is being passed passed to direct linear descendants.

Example:

• Home value: £250,000
• Left to children
• RNRB limited to £250,000 (not the full £350,000)

This means a couple leaving a property worth £250,000 would only be able to claim £250,000 in RNRB (not the full £350,000).

Who Qualifies for These Allowances?

To benefit from RNRB:

• You must own a home or a share of one
• It must be passed to direct linear descendants.
• The home must be part of your estate when you die

On the other hand, If you have downsized or sold your home, a downsizing addition may apply, but that requires careful record-keeping and planning.

Calculating Your Inheritance Tax

Here are three examples that show how this works in practice:

1. Full Allowance Example

Mr. and Mrs. Green:

• Own a home worth £500,000
• Total estate worth £800,000
• Leave everything to their children

Calculation:

• NRB: £325,000 x 2 = £650,000
• RNRB: £175,000 x 2 = £350,000
• Total tax-free: £1,000,000
• Estate value: £800,000

Result: The value of the property is greater than £350,000 so all available RNRB can be claimed. Which means, no IHT to pay

2. Reduced RNRB Example

Mr. and Mrs. Brown:

• Own a home worth £200,000
• Total estate worth £700,000
• Leave everything to their children

Calculation:

• NRB: £325,000 x 2 = £650,000
• RNRB: Limited to £200,000 (value of home)
• Total tax-free: £850,000, but only ¨50,000 needed
• Estate value: £700,000

Result: Also, no IHT to pay (even though they can’t claim full RNRB, their estate is still under the total NRB available)

3. Estate Under £1 Million But Still Pays IHT

Mr. and Mrs. Taylor:

• Home worth £300,000
• Total estate: £800,000 (includes pensions and savings)
• Leave estate to children

Calculation:

• NRB: £325,000 x 2 = £650,000
• RNRB: Limited to £300,000 (property value)
• Total allowances: £950,000
• Estate value: £950,000

Taxable amount: £900,000 – £850,000 = £50,000
IHT due: £50,000 x 40% = £20,000

Result: Even though their estate is under £1 million, they pay IHT because Mr and Mrs Taylor couldn’t claim the full RNRB.

RNRB Tapering

That said, many families need to be aware of the tapering applied to the RNRB which can reduce the amount of RNRB available. For estates over £2 Million, the RNRB is reduced by £1 for every £2 over £2 Million.

This means that estates over £2.7 Million see their RNRB reduced to Zero, resulting in an IHT liability of 40% of everything over £650,000 (For a married couple)

Final Thoughts

Had Mr and Mrs Taylor understood their allowances, they could have taken steps to reduce their estate and reduce or eliminate the amount of IHT they paid. Instead, they assumed, as many families do, that their estate fell inside the combined NRB and RNRB.

In conclusion, understanding how the NRB and RNRB work is crucial to effective estate planning. Many people mistakenly believe they’re entitled to a full £1 million exemption, only to find out their home value or family structure reduces that.

Working with a professional ensures your Will, Trusts, and estate are structured to make the most of your allowances so that your family inherits more, not less.

Need help calculating your IHT position?
Book a free consultation with Moneybox Wills & Trusts at our Macclesfield office today and get expert advice on how to protect your home and your family.