Inheritance tax confusion - Residence nil rate increasing threshold to £500k

socratez

Hi all. I am the executor for my mothers estate. She has around £180k in savings and the house has just been valued at £225k, meaning the total estate is £405k. The house is being passed down to myself and my siblings so the residence nil rate band will apply. This is where I am slightly confused. I have read that by including the residence nil rate band it raises the tax threshold to £500k, meaning I would not pay any tax. However from reading the gov site I understand the residence nil rate band tax threshold is £175k, meaning I would have to pay £50k in tax as the house value is £225k. Which one of these two outcomes are correct?

Thanks in advance!

kuratowski

The residence nil rate band (RNRB) is used in addition to the nil rate band.

It's used first.  So, as the house is valued over £175k, and is being left in full to direct descendants, the full £175k is available. 

After applying the £175k RNRB, the remaining estate is £230k (405 - 175).  This is below the nil rate band (£325k) so there is no inheritance tax to pay.

You can see the way that RNRB is used on IHT400 page 12, boxes 111-119 (Simple Inheritance Tax Calculation).  To claim the RNRB, you will need to complete IHT400 and send it to HMRC, prior to applying for probate.

socratez

kuratowski said:

The residence nil rate band (RNRB) is used in addition to the nil rate band.

It's used first.  So, as the house is valued over £175k, and is being left in full to direct descendants, the full £175k is available. 

After applying the £175k RNRB, the remaining estate is £230k (405 - 175).  This is below the nil rate band (£325k) so there is no inheritance tax to pay.

You can see the way that RNRB is used on IHT400 page 12, boxes 111-119 (Simple Inheritance Tax Calculation).  To claim the RNRB, you will need to complete IHT400 and send it to HMRC, prior to applying for probate.

Thanks Kuratowski, that is probably the most straightforward way I have seen it explained!

Keep_pedalling

If your mother is a widow then she may have the transferable NRB from her husband that you can use. If for instants he left her his entire estate you would have £650k before you need to use the RNRB. The advantage of being able to use the transferable NRB instead of her RNRB is that you won’t need to do an IHT return which is required if you use use the RNRB even if there is no tax to pay.

socratez

Keep_pedalling said:

If your mother is a widow then she may have the transferable NRB from her husband that you can use. If for instants he left her his entire estate you would have £650k before you need to use the RNRB. The advantage of being able to use the transferable NRB instead of her RNRB is that you won’t need to do an IHT return which is required if you use use the RNRB even if there is no tax to pay.

Thanks Keep pedalling, unfortunately not she was a single woman. I'm doing the IHT400 and related forms at the moment, they are a pain!

Keep_pedalling

How did you value the house? If you have taken the average from 3 estate agents I would use the highest valuation rather than average which reduces the risk of getting a CGT liability when it is eventually sold.