The family home is often the heart of an estate, and for many, it’s the single largest asset to consider when planning for inheritance. Understanding how the residence nil-rate band (RNRB) works—alongside the standard nil-rate band (NRB)—can make a significant difference to the amount of Inheritance Tax (IHT) your loved ones might pay. With careful planning, you can reduce or even eliminate IHT on property passed to children or grandchildren.
How the Nil-Rate Bands Work
The NRB is the basic allowance for IHT, currently set at £325,000 per person. This means the first £325,000 of your estate is tax-free. The RNRB is an additional allowance, up to £175,000 per person, which applies when a qualifying residence (or an equivalent value of assets) is left to direct descendants—children, stepchildren, adopted children, or grandchildren.
Unused NRB and RNRB from the first spouse or civil partner to die can usually be transferred to the survivor. This means a couple could potentially pass on up to £1 million tax-free if both bands are fully available and the estate is structured correctly.
However, there’s a catch: if the estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over the threshold. This tapering can mean the RNRB is lost entirely for very large estates.
Downsizing and the RNRB
If you’ve sold or downsized your home, you can still claim the RNRB, provided assets of the right value are left to direct descendants. It’s important to keep records of the sale price and how the proceeds were reinvested—whether in a smaller property, investments, or savings. This evidence will support your claim for the downsizing addition.
Worked Examples to Bring It to Life
Let’s look at how this works in practice:
Couple with a £900,000 estate and a £500,000 home left to children: They can use two NRBs (£650,000) and two RNRBs (up to £350,000), allowing up to £1 million to pass tax-free. If both bands are fully available, there’s likely no IHT to pay.
Single person with a £650,000 estate, home worth £400,000 left to children: The NRB (£325,000) plus RNRB (up to £175,000) gives £500,000 tax-free. IHT may be due on the remaining £150,000.
Estate worth £2.3 million: The RNRB is tapered and may be lost. In this case, consider lifetime gifts, charitable legacies (which can reduce the IHT rate to 36%), or restructuring the estate to keep below the taper threshold.
Practical Steps to Maximise Allowances
Start by checking the title ownership of your home. Make sure your will leaves the property (or equivalent assets) to direct descendants if you want to use the RNRB. If you’ve downsized or sold your home, document the sale and show where the value went—this could be into a smaller property, investments, or savings.
Estimate the total value of your estate, including life insurance and death-in-service benefits. These can push you over the £2 million taper line, so it’s important to include everything.
If your estate is close to or above the taper threshold, consider making lifetime gifts to reduce its value. Charitable legacies can also help, as leaving 10% or more of your estate to charity reduces the IHT rate on the rest from 40% to 36%.
Common Pitfalls and How to Avoid Them
One common mistake is failing to update your will after selling or downsizing your home. If the will doesn’t leave assets of equivalent value to direct descendants, you could lose the RNRB. Another pitfall is not keeping records of the sale and reinvestment, which can make it difficult to claim the downsizing addition.
It’s also easy to overlook the impact of life insurance and other benefits on the total estate value. These can tip you over the £2 million threshold and reduce or eliminate the RNRB.
Example: Downsizing Addition in Action
Suppose you sold your family home for £400,000 and moved into a flat worth £200,000, investing the remaining £200,000 in savings. If your will leaves both the flat and the savings to your children, you can still claim the full RNRB, provided you keep clear records of the sale and how the proceeds were allocated.
Key Takeaway
Combining the NRB and RNRB can make a huge difference to the amount of IHT your family pays. Watch out for the tapering rules if your estate is close to £2 million, and keep thorough records if you’ve downsized or sold your home. With careful planning and clear evidence, you can maximise your tax-free allowances and pass on more to your loved ones.
Disclaimer: This article is for general information only and does not constitute legal, financial or tax advice. Every estate is different, and outcomes depend on your specific circumstances. Take time to familiarise yourself with the rules and keep your paperwork up to date.