Part 2 – Residence Nil Rate Band – Potential planning considerations

Last weeks article covered the introduction of the ‘residence nil rate band’ (RNRB) and the benefits this brings in relation to inheritance tax (IHT). We now consider the situation where the RNRB could reduce either partially or entirely in some cases. We then consider some of the opportunities available to ensure the RNRB is maintained.

To recap, the RNRB is £175,000 for the current tax year and will increase in line with the Consumer Prices Index (CPI) in subsequent years. However, this will reduce by £1 for every £2 by which a deceased’s net estate exceeds the taper threshold, which is currently £2m.

“Net estate” means everything to which the deceased is beneficially entitled to after deducting liabilities such as loans but before deducting exemptions and reliefs such as business or agricultural property relief.

This means that business and agricultural property is included at its full value, thereby preventing many farmers and business owners from benefiting from the RNRB altogether. Equally, the fact that property may pass to a charity and be exempt from IHT has no impact the value of the estate for taper purposes.

Tapering may also apply to reduce any transferable (or ‘brought forward’) RNRB where the estate of the first to die exceeds £2m. Consequently, if, in the case of married couples or civil partners, the estate on the second death is sufficiently large, both the RNRB of the survivor and any brought forward transferable amount could be lost altogether. This will be the case even if the estate on the first death was below the £2m taper threshold and/or the RNRB was not used.

Example – Gillian

Gillian, a widow (who has inherited her late husband’s entire estate of £1.25m) dies in July 2021 with an estate of £2.5m that includes a main residence worth £1.6m. Her estate would ordinarily benefit from:

  • A standard nil rate band of £325,000 uplifted by 100% under the transferable nil rate band rules to £650,000; and
  • A residence nil rate band of £175,000 – similarly uplifted to £350,000.

As Gillian’s estate exceeds the £2m threshold by £500,000, the residence nil rate amount available will be reduced by £250,000 to £100,000. This means that even though her late husband’s estate was well within the taper threshold and he used no part of his own RNRB, his RNRB is effectively lost.

Her standard nil rate band is not affected by the value of her estate and the estate therefore benefits from a total nil rate band of £750,000 on her death.

Preserving the RNRB

The practical effect of taper is that for a single person who dies in 2020/21 tax year, the RNRB will be lost altogether where the estate exceeds £2.35m. For married couples or civil partners who are leaving everything to the spouse/civil partner on first death, the corresponding figure on the second death is £2.7m (tax year 2020/21).

Where married couples or civil partners may be liable for tapering of the RNRB, they may want to consider steps to preserve entitlement to the RNRB. These could include:

  • Giving away surplus income to stop the estate from growing in value;
  • Making lifetime gifts excluding their family home;

Example – Roger

Roger, a divorcee, owns a house worth £1.85m, a business property share portfolio worth £500,000 and investments of £150,000. He plans to leave all his estate to his adult children, Brad and Angelina. Currently, on Roger’s death, due to the impact of the taper rules all the RNRB will be lost. By making a gift of the business property share portfolio – even a few weeks before death – his estate will qualify for a full RNRB. This could result in an IHT saving of as much as £70,000 now the RNRB is fully phased in.

There are potentially other considerations associated to lifetime gits which will need to be considered alongside the potential benefits of preserving the RNRB.

Trusts and the RNRB

In certain circumstances, property settled in trust on death will also be deemed to have been closely inherited. This is dependent on the type of trust, property to be held absolutely for the benefit of someone falling within the extended definition of a direct descendant will be classed as closely inherited. Where property is left to a discretionary trust, it can never be ‘closely inherited’ – even if all the beneficiaries of the trust are direct descendants.

This can have implications for Will drafting, and Wills made before the changes were announced should therefore be reviewed to make sure that they remain IHT effective.

The Downsizing Provisions

For people who wish to downsize or sell their property before their death (for example, to move into residential care) will, in certain circumstances, be compensated for lost RNRB with a ‘downsizing addition’.

The downsizing provisions apply where a person who dies on or after 6 April 2017 has either disposed of their only residence on or after 8 July 2015 or downsized to a lower value property since that date and lost out on all or part of an RNRB as a result.

In such cases, provided that there are other assets in the estate that are closely inherited, the estate may qualify for compensatory ‘additional’ nil rate band (ANRB).

The amount of the ANRB will generally be equal to the RNRB that has been lost as a result of the disposal, however, the position will not always be this straightforward as the amount deemed to have been lost must be calculated in percentage terms in accordance with a fairly involved formula.


The rules in relation to RNRB can be complex but provide significant IHT benefits. It is essential to understand how to maximise the use of the RNRB and to ensure that any actions taken do not inadvertently result in it being lost.

Whilst RNRB will undoubtedly be useful to those with a potential IHT liability who are planning to leave a private residence to children or grandchildren, it is unlikely to mean the IHT liability disappears altogether and other planning will therefore frequently be necessary.


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