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Inheritance tax

The £1 million nil rate band

The Summer Budget on 8 July 2015 saw the Conservative party announce the ability for a married couple or civil partners to pass on £1m without any inheritance tax (IHT).

But is this as good as it first appears?

The simple way of increasing the amount an individual could pass on would have been to increase the IHT standard nil rate band. This amount is currently £325,000 and allows a married couple or those in a civil partnership to pass on up to £650,000 before any IHT is charged. However, the Chancellor decided not to increase this from £325,000 to £500,000, preferring instead to introduce an additional Residence Nil Rate Band (RNRB) to run alongside the standard IHT nil rate band.

At the same time, he also chose to extend the freeze on the standard IHT nil rate band, meaning that it will now remain at the current level of £325,000 until at least 5 April 2021.

The available nil rate bands will look like this for the forthcoming years:

Tax Year
Nil Rate Band
Nil Rate Band
Total for an
Total for
a Married Couple
or Civil Partners

The Government has stated that from April 2021 the standard IHT nil rate band and the RNRB will increase in line with the Consumer Prices Index, rounded up to the nearest £1,000.

No increase has happened since April 2009 when the nil rate band was increased from £312,000 to £325,000. Advisers may want to wait until 2021 to see if it actually increases, but this freeze has meant that many more individuals pay IHT, some on the back of dramatic increases in property prices.

Between 5 April 2009 and 8 July 2015 (when the RNRB was announced), the Halifax Property index had increased by 29.81%. A similar increase in the IHT nil rate band would have meant an amount over £420,000 could have been passed on by an individual. And over the same time, the FTSE100 increased by over 100%.

New residence nil rate band

The new RNRB will be introduced from April 2017.

Initially, it will be set at £100,000 and it will increase by £25,000 each year until it reaches £175,000 in April 2020. When coupled with the standard IHT nil rate band, the RNRB will potentially allow individuals to pass on a total of £500,000 before IHT becomes payable. Provided the necessary conditions for the RNRB are satisfied, a married couple or those in a civil partnership will therefore be able to leave their family £1 million free of IHT between them. Just like the standard nil rate band, any unused RNRB on the first death will be transferable so that it can be used on the second death, even if the first death occurred before 6 April 2017. 

The new RNRB does come with conditions attached and so may not be available or available in full to everyone Let us look at some of the factors that will affect the availability and use of the RNRB:

Qualifying residential interest 

  • The RNRB is available only to those who held a ‘qualifying residential interest’ immediately prior to their death. Simply, they need to have owned or had part ownership of a property that was their residence at some point during the period of ownership (but see below under ‘Downsizing’).
  • The RNRB cannot be offset against other properties owned by the deceased; for example, buy-to-let or investment properties. However, if the deceased has two homes, then the personal representatives can nominate which property will utilise the RNRB.
  • Any individuals who do not own their home will be unable to utilise the RNRB as they will not have a qualifying residential interest (although the RNRB may still be available in some cases – for example where the deceased ‘downsized’ or sold a property to move into residential care after).
  • It will also affect those that have released equity from their property as it is the net value of the home that will be used, so the value of any outstanding loan against the property will have to be deducted from the value to arrive at the net value to be used.


  • In order to pass on a qualifying residential interest and use the RNRB, the property needs to be ‘closely inherited’.
  • This means that the property must be passed either to lineal descendants such as children or grandchildren (this includes adopted children, step-children, fostered children and those under the special guardianship as defined by the Children Act 1989 s14A or equivalent legislation for Scotland and Northern Ireland and their children); or to a widow(er) or surviving civil partner of a lineal descendant who has not remarried or entered into a civil partnership by the time of the property owner’s death.
  • If an individual, a married couple or civil partners do not have any lineal descendants that qualify, they will be unable to use the RNRB.

Transferring unused allowance

  • Like the standard IHT nil rate band, any unused RNRB can be transferred between spouses and civil partners to be used when the survivor of them dies. The transferable RNRB must be claimed by the executors within two years from the end of the month in which second death occurs.
  • Where the first death occurs before April 2017, 100% of the RNRB will be available to be transferred when  the surviving spouse or civil partner subsequently dies unless the estate was 'large' (see below). This is the case regardless of whether or not the first to die owned a qualifying residential interest.

Large estates

  • There is a ‘taper threshold’ for large estates which, from April 2017, will be set at £2 million, including the value of the residential property.
  • In determining whether the £2 million threshold is breached, it is necessary to ignore reliefs and exemptions. This is an important provision as it means, for example, that one ignores business property relief and agricultural property relief even though, if relevant, they are taken into account to calculate the liability to IHT.
  • Where an individual leaves an estate in excess of £2 million, the RNRB that can apply to their estate is reduced by £1 for every £2 the estate is over this threshold.
  • So, when the RNRB is introduced at its initial level of £100,000, an estate of £2.2 million or higher will mean that the deceased will have no RNRB available. When the RNRB is up to £175,000 in the 2020/21 tax year, estates of £2.35 million or greater will not benefit from an RNRB. 
  • If the deceased has brought forward an unused RNRB from a spouse or civil partner then this can also be factored in, so some individuals may not see the RNRB fully disappear until the estate is worth in excess of £2.7 million.

As you can see, not everyone will benefit from the full or even any RNRB.


HMRC have provided further details of how people can downsize and still benefit from the RNRB.

The provisions apply to situations where someone has: 

  • downsized to a less valuable residence and the new property, together with other assets of an equivalent value to the ‘lost’ RNRB, has been left to lineal descendants
  • sold their only residence, and the sale proceeds (or other assets of equivalent value) have been left to lineal descendants
  • otherwise ceased to own their residence and other assets of equivalent value have been left to lineal descendants

The qualifying conditions for the RNRB after downsizing are broadly the same as those for RNRB:

  • The individual died on or after 6 April 2017
  • The property must have been owned by the individual and it would have qualified for the RNRB had the individual retained it
  • A lower value property, or other assets if the property has been disposed of, are in the deceased’s estate
  • A lower value property, and other assets of equivalent value, are inherited by the individual’s lineal descendants on that person’s death

In addition, the following conditions would also apply:

  • The downsizing or the disposal of the property occurs after 8 July 2015
  • As for the RNRB, the value of the property would be the net value after deducting any mortgage or other debts charged on the property
  • The downsizing RNRB would be tapered away in the same way as the RNRB for estates above £2 million
  • The downsizing RNRB would be applied together with the available RNRB, but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year
  • A claim would have to be made for the downsizing RNRB in a similar way that a claim is made to transfer any unused RNRB

There will be no time limit on the period in which the downsizing or the disposals took place before death and there could be any number of downsizing moves between 8 July 2015 and the date of death of the individual.

Downsizing would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it.

RNRB example

Now we have given an overview of the RNRB, let us consider an example.

Scenario 1

Eric dies in May 2017 leaving a wife, Joan, and their adult son, Arthur. The family home was valued at £400,000 at that time and other assets, such as investments and cash, totalled £1,000,000. Everything was held jointly between Eric and Joan.

  • The spousal exemption applies meaning that ownership of the family home and other assets passes to Joan without any IHT being due and Eric’s NRB and RNRB are unused.
  • Subsequently, in July 2020, Joan dies and leaves her estate to Arthur. At that time the house has increased in value to £600,000 and the other assets are now worth £800,000, giving a total estate of £1.4 million.
  • Joan’s executors have her unused nil rate band of £325,000 and as she owns a qualifying residential interest on death, the RNRB is also available to use against her estate. As Eric left everything to Joan, her executors can claim his unused RNRB in addition to his unused standard nil rate band.
  • Joan’s estate can therefore benefit from a total of £1 million in nil rate bands; two standard nil rate bands of £325,000 and two RNRBs of £175,000 (note that had the value of the house been less than £350,000 at the time of Joan’s death, the total amount of RNRB available to Joan would have been limited to the value of the house).
  • After allowing for the available nil rate bands, the residual value of the estate is £400,000 and IHT of 40% means a tax liability of £160,000 on the amount being inherited by Arthur.
    But what if someone had utilised some of their RNRB when they died?

Scenario 2

  • George died on 23 March 2002 with an estate worth £500,000.
  • George owned the family home as tenants in common with his wife, Marjorie.
  • George left his share of the family home to his son, Terry. The value of George’s share at the time was £75,000.
  • The residue of his estate was bequeathed to Marjorie.
  • The transfer of £75,000 utilised 75% of his deemed RNRB of £100,000.
  • On Marjorie’s subsequent death on 23 May 2020, her executors can claim George’s unused standard nil rate band of £325,000 and 25% of the RNRB of £175,000, giving a total of £325,000 + £325,000 + (£175,000 + (25% x £175,000) = £218,750).

IHT receipts

The RNRB is an additional factor to take into account when considering estate planning. Despite the Treasury introducing this additional allowance, the effect of freezing the IHT nil rate band means that it still expects IHT receipts to increase over the coming years.

Indeed, the number of estates making a contribution to IHT will be higher at the end of the decade than in any year since its introduction.

The £1 million nil rate band may sound like a great thing, and for the right client it will provide valuable IHT benefits, but not everyone will be able to take advantage of it.

Tax planning and professional advice will be vital to ensure that estates and wills are structured in the most tax-efficient way and that clients understand the amount of nil rate band that will be available in their specific circumstances.

RNRB in Brief
 It will be phased in gradually between 6 April 2017 and 6 April 2020

It will be £100,000 for the tax year 2017/18, rising to £175,000 for the tax year 2020/21

Thereafter, it will increase in line with the CPI

The property must have at some point been occupied by the deceased as a residence

The RNRB is limited to the net value of the property; that is, after any outstanding mortgage or charge has been deducted

The RNRB will be available when the ‘qualifying interest’ is transferred on death to lineal descendants

In general, the transfer must be outright but transfers into some types of trust are acceptable

This excludes discretionary will trusts

Special rules will be introduced to protect those who downsize

The deceased’s RNRB will be set off against the residence before the standard nil rate band is set off against the balance of the estate, including any value of the residence in excess of the RNRB

The £2 million threshold will also increase in line with the CPI from 6 April 2021

Any RNRB that is not used on first death can be transferred to a surviving spouse or civil partner

This is the case regardless of when the first death occurred and whether the deceased could have used their RNRB or not

The amount unused (expressed as a percentage of the amount available) will be applied to uplift the survivor’s RNRB entitlement on second death

If the first death occurred before 6 April 2017, the deceased’s available RNRB is deemed to be £100,000 

If both deaths occur before 6 April 2017, no RNRB is available

Where the value of the deceased’s net estate exceeds £2 million, the RNRB will be reduced by £1 for every £2 above that limit

This means that, in 2020/21, there will be no RNRB available on first death if the net value of the deceased’s estate exceeds £2.35 million

This figure will be £2.7 million on the death of a surviving spouse when a full transferable RNRB is available to the executors of the surviving spouse


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