Starting point: the standard nil-rate band
Every individual has a standard nil-rate band - the threshold below which no inheritance tax is charged on their estate. This has been fixed at £325,000 since April 2009 and is confirmed at this level until at least April 2030. Estates above this threshold pay IHT at 40% on the excess.
Married couples and civil partners can combine their allowances. Any unused nil-rate band from the first spouse to die transfers to the survivor. In theory, a married couple can therefore pass up to £650,000 free of IHT - provided neither spouse used their nil-rate band in full during their lifetime.
What the residence nil-rate band adds
The Residence Nil-Rate Band (RNRB) is an additional allowance layered on top of the standard nil-rate band, specifically for the family home. It currently stands at £175,000 per person. Combined with the standard nil-rate band, each individual can potentially pass £500,000 to direct descendants free of IHT - and a married couple can together pass up to £1 million.
The £1 million threshold is the sum of two standard nil-rate bands (£650,000) and two residence nil-rate bands (£350,000). It is not a single allowance - it is the maximum achievable when all four bands are fully available and correctly used. Many estates do not qualify for the full amount.
Qualifying residential property
The RNRB applies only to a qualifying residential property - which has a specific meaning. To qualify, the property must have been the deceased's home at some point, and it must be included in their estate and left to direct descendants.
A buy-to-let property that was never lived in by the deceased does not qualify, even if it is the only property in the estate. A property that was once a main residence but was subsequently let out may still qualify, provided it forms part of the estate on death. The property does not need to have been the residence immediately before death - but there must have been genuine residential use at some point.
Who counts as a direct descendant
The RNRB applies when the qualifying property passes to direct descendants - a term that is broader than it might first appear.
- Children (including adopted children and stepchildren)
- Grandchildren and great-grandchildren
- Spouses and civil partners of the above, even if widowed
- Foster children, in some circumstances
Notably, stepchildren qualify - they are treated as direct descendants for RNRB purposes even though they do not inherit under the intestacy rules. A step-parent who leaves their home to a stepchild by Will can claim the RNRB on that transfer.
The RNRB does not apply if the property passes to siblings, nephews and nieces, unmarried partners, or friends - regardless of how close the relationship.
The £2 million taper
For larger estates, the RNRB is tapered away. For every £2 by which the net estate exceeds £2 million, £1 of RNRB is lost. An estate worth £2.35 million loses the RNRB entirely. An estate worth £2.175 million loses half of it.
The taper applies to the net estate - assets after deducting liabilities - before reliefs and exemptions. This means the value of business property, agricultural property, and charitable legacies may affect the taper calculation even if those assets are not themselves chargeable to IHT.
For many Surrey families, the taper is a live concern. A couple with a home worth £900,000, significant pension savings, investments, and cash could easily find their combined estate in the range where the RNRB is partially or wholly tapered away.
Transferring unused RNRB between spouses
Like the standard nil-rate band, any unused RNRB from the first spouse to die can be transferred to the survivor. The transferred amount is calculated as a percentage of the RNRB at the time of the second death - so the absolute value of the transferred band reflects the current rate, not the rate at the first death.
Importantly, the transfer applies even if the first spouse died before the RNRB was introduced in April 2017. A widow or widower whose spouse died in 2005 - before the RNRB existed - can still claim a transferred RNRB on their own death, provided all other conditions are met. The first spouse's unused allowance is treated as 100% for transfer purposes if they died with no qualifying residential property in their estate.
Where the RNRB catches people out
Leaving to the wrong beneficiaries
The RNRB is lost if the property does not pass to direct descendants. A Will that leaves the home to a sibling, a cohabiting partner, or a discretionary trust without the right drafting may forfeit the RNRB entirely - potentially costing the estate up to £70,000 in additional IHT (40% of the £175,000 allowance).
Discretionary trusts
Property passing into a discretionary trust does not automatically qualify for the RNRB. Discretionary trustees have flexibility over who benefits, and HMRC takes the view that such property does not "pass" to direct descendants in the required sense. Immediate Post-Death Interest trusts and Bereaved Minor trusts do qualify, but discretionary trusts generally do not - unless there is a specific appointment to a qualifying beneficiary within two years of death.
The taper threshold
Estates that have grown through rising property values may cross the £2 million taper threshold without the owners realising. A couple in Surrey with a home worth £1.2 million, combined pensions now within IHT from 2027, and modest savings and investments may find their estates are larger than they think - and the RNRB partially or wholly lost as a result.
No qualifying property in the estate
If you have sold your home and moved into care or rented accommodation before death, there may be no qualifying residential property in your estate. The RNRB can still be claimed in this scenario - via a downsizing addition - if you sold a qualifying property after July 2015 and the proceeds are in the estate. The rules are complex, but the relief is available if the conditions are met.
Practical planning points
- Check your Will's beneficiaries. Ensure the home passes to direct descendants explicitly. If there is a trust in place, check that its structure qualifies.
- Model your estate value. Know whether you are above, at, or approaching the £2 million taper threshold - particularly given the pension changes from April 2027.
- Consider the transferred RNRB. If your spouse died before you, check whether their RNRB can be transferred and claimed on your death.
- Review after major life changes. Downsizing, moving into care, or a significant increase in asset values can all affect RNRB availability.
The bottom line
The RNRB is a valuable relief - but it is not automatic. It requires the right assets, the right beneficiaries, and the right Will structure. It is also, for wealthier estates in high-value areas like Surrey, increasingly subject to the taper - meaning some families who assume they will benefit in full will be disappointed.
Understanding precisely what your estate is worth, how it is structured, and what reliefs genuinely apply to you is the starting point for any sensible IHT planning conversation.
The information in our guides is provided for general information only and is not a substitute for advice based on your individual circumstances.
Wills, trusts, inheritance tax, Lasting Powers of Attorney and estate planning can be complex, and the right approach will depend on your family, finances, assets and wishes. Laws, tax rules, allowances and guidance can also change over time.
You should not act, or decide not to act, solely on the basis of the information in these guides. Where appropriate, you should obtain personalised legal, financial or tax advice before making any decisions.
Reading a guide or completing the Family Risk Review does not create a client relationship with Prime Wills & Estate Planning.