NRB and RNRB Calculations and Understanding

carlh30

Hi,

I've trawled the forums and I'm trying to get my head around combined allowance calculations with gifts please. I have an Accountant and Lawyer - but looking for knowledge.

If my surviving parent died (i.e mum), there will be £642K of NRB allowance and £350 RNRB (dad passed on allowance). So, officially nearly the maximum allowance.

The estate is currently worth £2.1m (Shares, cash, ISA's, Bonds, property, etc)
Gifts in the last 7 years amount to £50k currently

So: Scenario (1)

1. I understand that the RNRB decreases £1 per £2 over £2m (so a reduction of £20k on these current figures off the RNRB) = RNRB £300k.
2. So, that reduces allowance to £942k - that all makes sense (£642 NRB + £300k RNRB) - then take off gifts of £50k

My question is what reduces first - or how?! (or does it not matter?)

Do you reduce the RNRB first based on gifts (and estate being over £2m), then use the NRB (when RNRB has run out) - or just combine it all? The property is £670k but was downsized from a sale of £1.152m (leftover cash now making up part of the £2.1m) - not sure if we now need to look at "Lost RNRB"??!!

So: Scenario (2)

If then (for instance) £300,000 is gifted prior to death (which my mum is considering), would this reduce the estate value to £1.8m, but add to the gifts to = £350k (thus reducing the gross estate to below the £2m allowance - but to what effect?). Is the RNRB is not reduced because estate is below £2m - but gifts must be taken out of other allowance).

Quite confused as to what to calculate first (if at all) and how the estate value is calculated before allowance - i.e how do gifts affect each allowance. Not to mention BPR - which seems to confuse the issue further - you can ringfence for 2 years, but this still has detriment: "Although the assets receive 100% relief from IHT after two years, they still form part of the estate as far as the £2m threshold for the RNRB is concerned"

I am getting very confused - whilst just trying to do the right thing for our estate!!

Thank you.

getmore4less

Might be time to look through the HMRC IHT manual.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46000

There is a lot to read and links to follow, plenty of examples.

waveyjane

I agree it's pretty confusing.

My undertanding is that that RNRB only reduces on the vaue of the combined estate's £2m+ value (£1 per £2 over £2m), and assuming the residential property is worth more than the default RNRB. So if the house is worth, say £150K, then that's the value of the transferrable RNRB, and the £2m rule starts from that value.

The transferrable NRB, on the other hand, is only affected by gifts. So if gifts made by the deceased within seven years of death are at or below £325K (less the annual £3K allowance which only applies in year the gift was made? Not sure), the value of those gifts are taken off the deceased's NRB. If they are over £325K then they qualify for taper relief over the seven years.

But I could be wrong.

Oh and also… I think (but am not sure!) that when we say "value of the estate" on first death when it comes to the transferrable nil rate bands, we are talking about the deceased's estate, not the combined estate. So in the case of the RNRB, if the house was, say, £150K but held as tennants in common, then the first to die's transferrable NRB would only be £75K (their half of the house value). No, I think that's wrong come to think of it.

Maybe somebody can clarify.

Keep_pedalling

it would make sense to make substantial gifts now, although it will only reduce IHT is she survives for 7 years after make those gifts, it would have no impact on hoe the RNRB.

With an estate of this size I would suggest she looks at gifting over her NRB as anything over that amount will be subject to taper relief with only required her to survive for three years to gain some reduction in IHT.

https://moneytothemasses.com/tax/inheritance-tax-iht-taper-relief-on-gifts-explained#:~:text=More%20precisely%2C%20if%20the%20donor,is%20known%20as%20Taper%20Relief.

carlh30

Thank you - yep, I'm pretty confused and I have been trawlign through the manual trying to extrapolate. Tahnsk all for comments.