If you own a home and plan to leave it to your children or direct descendants, the Residence Nil-Rate Band (RNRB) is a key tax allowance to consider. It can significantly increase the amount you can pass on tax-free, adding up to an additional £175,000 on top of the standard £325,000 nil-rate band. This means your estate could benefit from a total inheritance tax-free threshold of up to £500,000.
Understanding how to use the RNRB correctly can help you reduce the inheritance tax bill your beneficiaries might face. The allowance applies specifically when passing on a qualifying residential property, so knowing the rules and thresholds is essential to maximise your tax relief.
The Residence Nil-Rate Band (RNRB) offers an additional inheritance tax allowance specifically for passing on your main residence to direct descendants. Knowing how it interacts with the standard Nil Rate Band (NRB) and its historical development helps you make informed estate planning decisions.
The RNRB is an extra threshold on top of the standard Nil Rate Band designed to reduce the inheritance tax (IHT) payable when your main residence is left to children or grandchildren. Introduced in April 2017, it targets family homes to preserve assets across generations.
It applies only if you leave a residence to lineal heirs, such as your children or grandchildren. You cannot use it if the estate does not include a qualifying home or if the property is left to others. This allowance can make a substantial difference, potentially saving up to £350,000 from IHT for married couples.
The standard Nil Rate Band (NRB) is the basic IHT allowance, currently set at £325,000 per person. Your RNRB is added on top of this.
For example, in the 2020-2021 tax year, the RNRB was set at £175,000, meaning an individual could pass on £500,000 tax-free (£325,000 NRB + £175,000 RNRB). For a couple, this can total £1 million.
The RNRB is deducted from your entire estate value, not just the property. If your estate’s total value exceeds the thresholds, the tax relief applies against the whole estate’s IHT liability rather than solely the home’s value.
The RNRB was introduced on 6 April 2017, starting at £100,000. It has increased annually by £25,000 until it reached £175,000 in the 2020-2021 tax year.
This allowance continues to be reviewed, so keeping up to date with tax year changes is important. The RNRB can save couples up to £350,000 collectively in inheritance tax when passing on their main residence.
However, it tapers away for estates valued over £2 million, reducing the relief by £1 for every £2 above this threshold. Understanding these limits helps you plan effectively to maximise tax efficiencies.
To benefit from the Residence Nil-Rate Band (RNRB), you must meet specific conditions related to the property and the beneficiaries. Your main home must qualify, and it has to be passed to eligible individuals when you die. Understanding who qualifies and how multiple properties are treated will help you optimise the allowance effectively.
Your main residence or family home must be an eligible property to qualify for the RNRB. It needs to have been your home at some point during your lifetime. The property does not necessarily have to be your main residence at the time of death, but you must have had a qualifying residential interest (QRI) in it. This means you owned or had rights to live in the property.
The property can be a house, flat, or a share of one. It must be located in the UK. You cannot claim the RNRB for second homes, holiday homes, or rental properties. If you sell your home or downsize before death, downsizing provisions may allow a reduced RNRB to be claimed, provided the replacement property is left to direct descendants.
To use the RNRB, the family home must be left to direct descendants. These include your children, grandchildren, adopted children, stepchildren, and foster children. It also extends to children of a deceased direct descendant, creating a clear lineal path.
The estate must pass the residence to these lineal heirs to qualify. Other beneficiaries, such as unrelated individuals or charities, do not count. Some exceptions include guardians or special guardians if they are raising the children. The rules are designed to benefit those continuing the family lineage through the home.
Only one property can qualify for the RNRB in any estate, even if you own more than one home. If you have multiple residences, you must select which one qualifies for the allowance.
There are provisions for complex family situations and multiple properties through downsizing or property transfers between spouses or civil partners. Where applicable, unused RNRB can be transferred to a surviving spouse or civil partner, allowing combined use of the allowance.
If you jointly own more than one residence, the allowance is split proportionally based on ownership shares. Careful planning is needed to optimise use if multiple residential interests exist in your estate.
Understanding how the Residence Nil-Rate Band (RNRB) works is essential to reducing your inheritance tax bill. The value of your estate, your ownership status with a spouse or civil partner, and specific rules about property inheritance all affect how much RNRB you can claim.
The RNRB starts to reduce when your estate value exceeds the £2 million taper threshold. For every £2 of estate value above this limit, £1 of RNRB is lost.
If your net estate is larger than £2 million, the maximum RNRB (£175,000 per individual as of 2025) will decrease progressively, potentially to zero for very large estates.
This tapering means estates worth more than £2.35 million may receive no RNRB, so planning is crucial if your estate is near or above this value.
If your spouse or civil partner dies first and does not use their full RNRB, the unused portion can transfer to the surviving spouse.
You can combine your RNRB with any unused allowance from your partner’s estate, effectively doubling the available tax-free threshold on a qualifying residence, up to £350,000.
This transferable RNRB applies regardless of when the first spouse died, provided the claim is made at the second death’s Inheritance Tax return.
Spousal transfers help maximise relief and ensure no allowance is wasted between married couples and civil partners.
If you have downsized or sold your home before death, you might still claim RNRB based on the value of the home you once owned.
Downsizing provisions allow you to apply the RNRB to other assets, providing those assets pass to direct descendants, compensating for lost RNRB after selling or moving.
To qualify, you must have owned a residence that was part of your estate at some point, and downsizing relief calculates the “lost” band relative to the original property value.
This provision ensures that those who reduce property size in later life are not unfairly penalised.
The RNRB only applies if you pass a qualifying residence to direct descendants such as children or grandchildren.
When you inherit a share of the property or if the property value fluctuates before death, the RNRB is adjusted based on your exact share and the property's market value at the time.
Accurate valuation is important; undervaluing the property can reduce available RNRB and increase your tax bill.
If you inherit part of an estate, you may only claim a corresponding proportion of the RNRB, which must be carefully calculated for fair taxation.
Understanding these rules helps you maximise the potential tax benefits linked to your home inheritance.
Effective estate planning requires careful consideration of how trusts and wills interact with the Residence Nil-Rate Band (RNRB). Understanding the impact of different trust types, the importance of updating wills, and the use of gifting strategies can help you make the most of available tax reliefs.
When your family home is left in a discretionary trust, the RNRB often does not apply. This is because the relief only applies if the residence passes directly to your children or other direct descendants.
If you leave the property to a will trust that restricts access or control, the estate may lose the RNRB entitlement entirely. However, trusts that specify an absolute legacy to direct descendants typically preserve the RNRB.
You should review how trustees and personal representatives manage distributions since any deviation from direct descendant ownership can reduce or remove the relief.
Wills drafted before 2007 may not reflect current inheritance tax rules on RNRB. To optimise tax relief, you need to review your will regularly, especially if your circumstances or the law changes.
Using a deed of variation can adjust an existing will after death, allowing you to transfer assets or change beneficiaries to qualify for RNRB without rewriting the will entirely.
Clearly specifying that your home passes to direct descendants, either outright or through qualifying trusts, ensures the relief is preserved. Ambiguous or overly complex wording risks disqualification.
Gifting property or assets during your lifetime or under your will can reduce your estate’s taxable value, but the type of gift matters for RNRB eligibility.
An absolute gift of your residence to direct descendants generally retains the RNRB. On the other hand, placing the home into a discretionary trust removes the relief because ownership is not fixed to specific individuals.
Consider the timing and terms of gifts to balance flexibility with tax efficiency. Trustees managing discretionary trusts hold flexibility but at the cost of losing certain inheritance tax benefits linked to the residence.
Understanding how factors like lifetime gifts, property values, and timing affect your Residence Nil-Rate Band (RNRB) can help you optimise inheritance tax (IHT) planning. Missteps in these areas may reduce the allowance’s effectiveness or trigger unexpected tax charges.
When you give your main residence as a lifetime gift, it can affect your RNRB entitlement. The band typically applies on death, so gifting property during your lifetime removes that asset from your estate but may still be counted if you survive seven years.
You must consider capital gains tax (CGT) too. If the property value has increased since purchase, a lifetime transfer could trigger CGT, reducing the overall tax advantage. Unlike IHT, CGT applies immediately based on market value at transfer.
Remember, business property relief may apply if the property is used for business, lowering your tax liability. Always check how gifting interacts with both inheritance tax thresholds and CGT to avoid unexpected tax bills.
Coordinating the timing of your estate transfers can maximise the RNRB. Your allowance currently stands at £175,000, but careful planning can mean unused bands from a spouse or civil partner can be combined, doubling the relief to £350,000.
You should also be aware of the seven-year rule; gifts made over seven years before death are typically exempt from IHT, so timing matters. Delaying sales or transfers until property values stabilise can also help you retain maximum relief.
Utilise IHT reliefs strategically, and where possible, pair RNRB use with other allowances such as the standard nil-rate band to reduce your overall liability.
The RNRB is limited to the value of your main residence at death, capped at £175,000. If your property rises sharply in value, any amount above this cap could be subject to IHT.
Conversely, if your property value falls below this threshold, you cannot claim the full allowance. In cases of partial sales or downsizing, the available RNRB may be proportionally reduced.
Keep in mind that if you sell your property before death and downsize, legislation allows a downsizing addition so a previous residence's value can still qualify for RNRB, subject to strict conditions.
In all cases, monitoring property prices and adjusting your estate planning accordingly can protect your inheritance tax savings.
You should review your estate planning to ensure you fully utilise the Residence Nil-Rate Band (RNRB). This additional allowance can increase the amount you pass on tax-free when leaving a qualifying home to direct descendants.
Start by checking the value of your property and how it fits within the current RNRB thresholds. Remember, the RNRB is an extra £175,000 above the standard £325,000 nil-rate band per individual (fixed until April 2026).
If you have a partner, consider transfer of any unused allowance, potentially doubling the benefit to £350,000 for your combined estates.
Keep in mind:
You may want to seek professional advice to navigate its complexities and explore strategies such as lifetime gifts or trusts to maximise the relief.
Making the most of the RNRB involves timely planning and understanding the eligibility criteria. Keep your estate plans under regular review as rules and thresholds may change.
Trusted Consultants for Comprehensive Wealth Solutions – Whether you need a professional estate planning consultant, expert pensions consultant, or reliable inheritance tax advice, Assured Private Wealth is here to guide you. We also specialise in will writing services to protect your legacy.
Call us for a friendly chat on 02380 661 166 or email: info@apw-ifa.co.uk
