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Overview

If someone dies and their estate is worth more than the basic Inheritance Tax threshold, their estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due.

Residence nil rate band thresholds and interest rates

Find out the residence nil rate band thresholds from 2017 to 2026.

The threshold increases every year in line with inflation, based on the Consumer Price Index.

How to work out and apply the residence nil rate band

Use this calculator to work out:

• how much residence nil rate band the estate may get
• the residence nil rate band if a person downsized or sold their home
• any unused residence nil rate band for transfer to the estate

To use this calculator, you鈥檒l need to have:

• an IHT400 account form with the value of what鈥檚 in the estate already worked out
• an IHT435 form if you have already started filling one in
• a completed IHT436 form if you are transferring any unused additional threshold from another estate

Apply the residence nil rate band

Add the residence nil rate band to the basic Inheritance Tax threshold if the person and their estate meet the qualifying conditions.

This higher threshold does not mean that the home is exempt from Inheritance Tax but that can be the result in some cases.

Additional residence nil rate band may also be available from a late spouse or civil partner鈥檚 estate.

1. Add any transferred residence nil rate band that may be available from a late spouse or civil partner鈥檚 estate to the amount of the allowance due for an estate, to get a combined residence nil rate band.

2. Take off the combined residence nil rate band from the value of the estate.

3. Take off the basic Inheritance Tax threshold and any additional transferred unused basic threshold from the rest of the value of the estate.

Usually, the order you apply the residence nil rate band and basic Inheritance Tax threshold will make no difference. However, in some cases it will affect the amount of any unused additional or basic Inheritance Tax threshold available to transfer to a spouse or civil partner鈥檚 estate.

What happens if a home is worth less than the maximum residence nil rate band

The home inherited by direct descendants does not have to be worth more than the basic or transferred basic threshold, to get the residence nil rate band.

You apply the residence nil rate band to the whole taxable estate, not just to the value of the home, so the whole estate shares the benefit of the tax-free residence allowance.

If the home is worth less than the maximum available residence nil rate band, you cannot set the unused amount against the other assets in the estate. But, the unused amount would be available to transfer to their spouse or civil partner鈥檚 estate when they die and leave a home to their direct descendants.

Gifts and lifetime transfers

Unlike the basic Inheritance Tax threshold, the residence nil rate band does not apply to gifts and lifetime transfers, such as:

• transfers into trusts
• the value of any gifts made in the 7 years before the person that died gave them away (which are then taxable)

The basic Inheritance Tax threshold applies to any lifetime transfers and any gifts made in the 7 years before someone dies. But the residence nil rate band does not. So the basic Inheritance Tax threshold could be completely used up by those transfers and gifts. But any residence nil rate band would still be available to reduce the tax on the estate.

For married couples and civil partners, you look at the position for each person鈥檚 estate separately when each dies. This would include each person鈥檚 share of the home if it鈥檚 owned jointly.

Who is a direct descendent

For residence nil rate band purposes the direct descendant is:

• a child, grandchild or other lineal descendant
• a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

This also includes:

• a child who is, or was at any time, their step-child
• their adopted child
• a child fostered at any time by them
• a child where they鈥檙e appointed as a guardian or special guardian when the child is under 18

The person who inherits the home does not have to be under 18. A person鈥檚 step-child is only someone whose parent is, or was, the spouse or civil partner of that person.

Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the list above.

One or more direct descendants of the person that鈥檚 died can inherit a home, or a share of it.

For a home left to people who are a mixture of direct descendants, other relatives or other people, you must share the value of the home in proportion to the share of the property each direct descendant inherits.

How the direct descendants inherit the home

For homes that qualify for the residence nil rate band, there are rules about how the direct descendants inherit a home.

The home must be left to them:

• in the will of the person that鈥檚 died
• under the rules of intestacy
• by some other legal means

The home does not have to be specifically mentioned in the person鈥檚 will. It can be inherited as part of what鈥檚 left of the estate (the residue) after taking specific legacies into account.

The residue of the estate is what鈥檚 left after payment of:

• debts such as mortgages and loans
• funeral expenses
• executor鈥檚 fees
• taxes
• other expenses from administering the estate
• any specific gifts or legacies in the will

Where the home forms part of the residue and the residue has passed on to a number of different people, HMRC treat each of them as inheriting a proportion of the home.

For the residence nil rate band, inheriting the home only counts if the direct descendants become entitled to the home when the person dies.

For example, if the will has a condition that the grandchildren have to reach a certain age before they can inherit the home, the property is held in a trust, so the residence nil rate band will not apply. This is because the grandchildren do not inherit the home at the time that their grandparent dies.

If the home is held in a trust before a person dies and it stays in trust when they die, the home will only qualify for the residence nil rate band if it becomes part of the direct descendant鈥檚 estate after the person dies.

The actual home does not have to end up in the hands of the direct descendants. An estate could still be eligible for the residence nil rate band if the estate鈥檚 personal representative sells the home as part of the administration of the estate and passes the sale proceeds to the direct descendants.

In the same way, once the direct descendants have inherited the home, there are no restrictions on what they can do with it. An estate will still qualify for the residence nil rate band, even if the direct descendants decide to sell the home after they鈥檝e inherited it.

The direct descendants can also inherit the home if it鈥檚 left to them as a result of amending the will by a deed of variation. The deed of variation replaces the terms of a will, so the outcome of the deed is considered, rather than the wording of the will.

What happens if the home is in a trust

A home, or a share of one could be either:

• held in a trust before a person dies
• transferred to a trust when they die

The availability of the residence nil rate band will depend on the type of trust.

This is because the type of trust will affect whether HMRC treats:

• the home as part of a person鈥檚 estate for Inheritance Tax purposes
• that person鈥檚 direct descendants as inheriting the home

How residence nil rate band tapers for estates over 拢2 million

The residence nil rate band will gradually reduce, or taper away, for an estate worth more than 拢2 million, even if a home is left to direct descendants.

The residence nil rate band will reduce by 拢1 for every 拢2 that the estate is worth more than the 拢2 million taper threshold.

The value of the estate for taper purposes is the total of all the assets in the estate less any debts or liabilities. When you work out how much the estate is worth, do not take off any:

• exemptions such as spouse exemption
• reliefs such as agricultural or business property relief

Ignore assets that are specifically excluded from Inheritance Tax.

How tapering can reduce the residence nil rate band available for transfer

Tapering can also reduce the amount of residence nil rate band available to transfer to a surviving spouse or civil partner, even if no residence nil rate band is used when the first of the couple dies.

You calculate the amount of transferred residence nil rate band that the survivor鈥檚 estate can claim using the percentage of residence nil rate band that was not used when the first of the couple died.

If the estate of the first of the couple to die is worth more than 拢2 million, tapering will reduce the amount of the unused residence nil rate band in that estate. This in turn reduces the amount of residence nil rate band that is transferable to the surviving spouse or civil partner鈥檚 estate.

When professional advice may help

HMRC cannot:

• give tax planning advice
• comment on what someone should do to take advantage of the residence nil rate band
• explain what someone鈥檚 entitlement to the residence nil rate band or tax position will be in the future

In some less straightforward situations you may want to get professional advice about:

• how to work out the residence nil rate band
• the effect of the residence nil rate band on the Inheritance Tax liability
• what action you need to take to make sure that an estate qualifies for the residence nil rate band