The Residence Nil Rate Band: Maximising This IHT Allowance

The Residence Nil Rate Band explained

The Residence Nil Rate Band (RNRB) was introduced in 2017 and reached its current level of £175,000 in April 2020, where it has remained (frozen until at least April 2031 under current government plans). It is one of the most significant IHT planning tools available to UK families — and one of the most frequently misunderstood.

Used correctly and in combination with the standard Nil Rate Band (NRB), the RNRB allows a married couple or civil partnership to pass up to £1 million free of inheritance tax — £650,000 of combined NRB plus £350,000 of combined RNRB. This is a substantial allowance, but it comes with conditions that must be met precisely.

The qualifying conditions

To claim the RNRB, four core conditions must be met:

A qualifying residential property must be in the estate. The property must be a dwelling that has at some point been the deceased's residence. It need not be the main residence at death — a second home that was previously lived in can qualify. A buy-to-let property that was never the deceased's home does not qualify. There is no minimum period of residence required, but HMRC will scrutinise arrangements where a property is briefly occupied shortly before death solely to establish RNRB eligibility.

The property must pass to direct descendants. Children (including adopted, step, and foster children), grandchildren, and their lineal descendants are direct descendants. Nephews, nieces, siblings, and friends are not. A spouse or civil partner inheriting is not a direct descendant — though the transferable RNRB mechanisms (discussed below) address this.

The estate must be below the taper threshold. The RNRB tapers away for estates with a net value above £2 million — reducing by £1 for every £2 above this threshold. A person with a net estate of £2.175 million loses the full £175,000 RNRB. For couples, the taper applies to each estate individually.

The claim must be made. The RNRB is not automatically applied; the personal representatives must include it in the IHT return (IHT435 for the deceased's own RNRB, IHT436 for a transferred RNRB from a deceased spouse).

The transferable RNRB

A married couple or civil partnership can transfer unused RNRB from the first death to the survivor. If the first to die did not use their RNRB — because the estate passed entirely to the surviving spouse (exempt from IHT under the spouse exemption) — 100% of the RNRB can transfer.

In practice, this means the surviving spouse may have access to £350,000 of RNRB on their own death — double the individual allowance — plus £650,000 of combined NRB, for a combined allowance of £1 million before IHT applies.

The transferable RNRB can be used even if the first spouse had no UK residential property in their estate. The transfer is of unused allowance, not of property. This is valuable for couples where the first spouse dies before the RNRB was introduced or before they purchased a qualifying property.

The downsizing addition

Many older individuals downsize to smaller properties or sell the family home to move into care. Before the downsizing addition was introduced, there was a risk that such people would lose their RNRB simply because they no longer owned a qualifying property at death.

The downsizing addition preserves the RNRB (or part of it) when a person:

• Has sold or downsized from a qualifying residential property since 8 July 2015;
• Had a RNRB entitlement at the time of the sale that exceeded the value of any remaining qualifying residential property;
• Leaves other assets (the "downsizing addition assets") to direct descendants to make up the shortfall.

The mechanics are complex, but the principle is straightforward: if you sell a home worth £300,000 and the RNRB is £175,000, provided you leave at least £175,000 of other assets to direct descendants, the full RNRB is available. The proceeds need not be specifically earmarked — they just need to remain broadly within the estate.

Detailed record-keeping of the sale price and date of any property disposed of after 8 July 2015 is therefore important for estate planning purposes.

The taper threshold and planning implications

The taper threshold is one of the crueller features of the RNRB for high-net-worth families. Estates between £2 million and £2.35 million lose some RNRB; estates above £2.35 million lose it entirely.

Because the taper operates on the net estate, gifts made within seven years of death (potentially exempt transfers, or PETs) reduce the estate for this calculation, potentially restoring some or all of the RNRB. This creates planning opportunities: a client with an estate of £2.2 million might make PETs sufficient to bring the taxable estate below £2 million and recover £100,000 of RNRB — saving £40,000 in IHT (at the 40% rate).

The taper also interacts with the decision about whether to use trusts in estate planning. Large trust funds may themselves not count towards the estate for taper purposes, depending on the trust type and timing. Specialist advice is essential.

The trust trap

This is the most frequently encountered estate planning error in relation to the RNRB: families who use discretionary trusts in their estate planning — often for sound reasons, including protecting assets for minor children or providing flexibility for the surviving spouse — may inadvertently forfeit the RNRB.

The RNRB requires the qualifying residential property to pass directly to direct descendants or to certain qualifying trusts. A discretionary trust — even one whose sole beneficiaries are children and grandchildren — does not qualify. If the will directs that the family home falls into a discretionary trust, the RNRB is lost on that property.

Qualifying trusts include: an immediate post-death interest (IPDI) trust where a direct descendant has an absolute right to income; a bereaved minor's trust; a 18-25 trust; and a disabled person's trust. These trust types preserve RNRB eligibility because HMRC treats the beneficiary as effectively holding the property.

Many families have wills with discretionary trust structures drafted before the RNRB was introduced, or advised for other planning purposes, that have not been reviewed in light of the RNRB. An outdated will may cost the estate up to £175,000 per person in avoidable IHT.

Expat and non-resident considerations

The RNRB applies only to UK residential property. An expatriate with no UK residential property in their estate cannot claim the RNRB, even if they were previously UK-domiciled and their worldwide estate is subject to UK IHT.

Purchasing a UK residential property primarily to secure the RNRB is generally not economically rational — the costs of ownership, SDLT on purchase, and the complexity of ongoing UK property ownership from abroad are unlikely to justify the IHT saving on a £175,000 allowance. However, where an expatriate intends to return to the UK anyway, or already holds UK residential property for other reasons, ensuring the property qualifies for RNRB should be part of the estate plan.

The basis of UK IHT changed from 6 April 2025: the domicile-based system was replaced by a residence-based one. Exposure to UK IHT on worldwide assets now turns on long-term UK residence (broadly, UK-resident in at least 10 of the previous 20 tax years) rather than domicile, while non-long-term residents remain within the charge only on UK-situs assets. This is a significant change from the previous regime — take current advice on how it affects your estate.

How Global Investments can help

Global Investments works with families on IHT planning that integrates the standard NRB, RNRB, and transferable allowances with wider estate planning — including trust structures, lifetime gifting, and property decisions. We can review existing wills for the trust trap, model the downsizing addition, and advise on structuring the estate to preserve the full RNRB. Contact our estate planning team to arrange a comprehensive review.