How to use the residence nil rate band in IHT planning

The residence nil rate band (RNRB) could save your clients up to £140,000 in Inheritance Tax by 2020. However, there are a number of ways in which the additional allowance could be lost or severely reduced.

Inheritance Financial advice

This guide illustrates how to take advantage of IHT savings and covers areas where there is potential for the allowance to be lost including:

  • who inherits their estate
  • how assets are inherited
  • lifetime gifting, downsizing or selling the family home
  • the value of their estate.

Any tax planning undertaken must still ensure that the property passes to the right people to the right time. Each case will be different so the following points are worth considering in the light of your individual clients’ needs.

1. Who inherits

In general, an estate will only be able to claim the RNRB where a house is left to ‘direct descendants’ (or downsizing provisions apply). A ‘direct descendant’ is broadly speaking a child/grandchild of the deceased, including step and adopted children. The definition also includes spouses of direct descendants.  Where property is to be split between direct descendants and non-direct descendants the RNRB will be restricted to the value of the part left to the child/grandchild.  Leaving the property to the direct descendant could allow more of the assets on death to pass to all beneficiaries.


George dies in December 2020. His estate includes a home worth £500,000 and other assets worth £500,000. His estate is left equally to his step-son and his nephew. George has inherited his spouse’s full RNRB and main IHT nil rate band on her death some years previously.

As George is deemed to have left only half the home to a direct descendant – his step-son, the available RNRB is capped at £250,000. The estate will pay £40,000 more in IHT than if the property had been left to the step-son and the other assets had been left to the nephew.

Main actions

  • Check all elements of family relationships are clear – the RNRB cannot be transferred to unmarried partners.
  • Where assets are to be split between direct descendants such as children and grandchildren and others, consider leaving the family home to the direct descendant if maximising the RNRB is a priority.

2. How assets will be inherited

As the RNRB will be increasing by £25,000 each tax year until 2020/21, this may mean that more relief will be available if it is claimed on the second death. This will be when many estates will claim it in the natural course of events as the majority of properties pass automatically to a spouse on first death. However, there will be cases where the RNRB is not transferable, for example where the homeowners are not married or in a civil partnership.  In these cases it may be worth severing the joint tenancy and leaving a share of the home to children or grandchildren on first death.  The efficiency of using the RNRB on first death should be balanced against the potential impact for the survivor.  Co-ownership could increase the risk of family disputes or it being affected by the divorce or bankruptcy of the new co-owners.

How property is inherited

The home doesn’t have to be specifically mentioned in the deceased’s will. It could be left in a will as a specific bequest or as part of the residue of the estate.  As long as the beneficiaries of the bequest or residue are direct descendants, RNRB will still be available.

The RNRB will remain available if the legal personal representatives (LPRS) administering the estate sell the property and pass the proceeds to the direct descendants instead of transferring ownership of the property to them.

Where a Deed of Variation is used, as long as the property passes after the variation to direct descendants, the estate will still be able to benefit from RNRB.


The RNRB is available where a property or share of a property is left to a ‘direct descendant’ as a beneficiary of one of the following trusts:

  • IPDI;
  • Bereaved Minor’s Trust and 18-25 trust (set up for children on death of parents);
  • Disabled trust;
  • Absolute trust.

Individuals may have planned to leave part or all of the property to a discretionary trust on first or second death. The RNRB will not be available to the estate where property is left to a discretionary trust.  This is because direct descendants have not inherited a right to the property.  This is the case even if all the discretionary beneficiaries qualify as ‘direct descendants’.


Where property has been left to a discretionary trust, the trustees may agree to wind up the trust and transfer the property to direct descendants. If this is done within 2 years of the date of death, RNRB may be claimed by the estate in the same way as if the property had always been left to the individuals directly.


Where a property is left to a discretionary trust on first death or an IPDI trust has been set up and the surviving spouse has the interest-in-possession, the unused RNRB is transferable to the spouse and may be able to be utilised on their death.


Care should be taken with a property left on a contingent trust, for example ‘such of my granddaughters as reach the age of 30’. The residence NRB would be lost if the granddaughters have not have reached the specified age at the time of death.


Any wills which place the family home into trust should be reviewed to see if it continues to meet their intentions and remains the most tax-efficient option for the client.

Main actions

  • Check that wills still meet the IHT and estate planning objectives of clients.
  • Consider whether bringing a discretionary trust to an end within two years of death could result in greater IHT savings

3. Lifetime gifts of property/share of property and downsizing

Lifetime gifting

The main residence nil rate band cannot be used with a lifetime gift of property. If death is within 7 years of the gift, only the main IHT nil rate band (where not used against other transfers) can be set against the transfer of property. However, if the gift was made after 7 July 2015 downsizing provisions may allow the RNRB (or an element of it) to be used where sufficient assets are left on death to direct descendants.

Lifetime gifting of the family home should be considered carefully against the background of the individual’s life expectancy, value of the property and plans for other assets in the estate.


Where the family home was disposed of after 7 July 2015, it may be possible to claim a downsizing adjustment. This can apply where the deceased moved to a lower value home or sold or gifted their home and no longer owned a home on their death.

The sale proceeds don’t need to be ring-fenced to leave to direct descendants on death, as long as assets of equivalent value are left to children/grandchildren. The RNRB will be capped at their value, so it could be lost if there are insufficient funds left in the estate to direct descendants to utilise it.

  • Ensure LPRs are aware of any lifetime gifts/sale of property so that any downsizing adjustment can be claimed.
  • Care needs to be taken that lifetime gifts of property or cash arising from the sale of the property are considered in the light of the downsizing provision, the overall IHT position of the estate and any long term care funding issues.

4.The value of the estate and the taper reduction

The wealthiest estates may not be able to benefit from the residential nil rate band. Estates worth over £2m will start to lose the RNRB, with it being withdrawn at a rate of £1 for every £2 over £2m. The taper test is applied on each death, including those before 6 April 2017.


It is not the value for IHT which is used to test whether tapering applies. The value will also include certain assets and transfers which may be exempt from IHT. These include:

  • property passing to the spouse,
  • assets qualifying for business property relief or agricultural relief.

However, for tapering purposes the value of lifetime gifts are excluded, even if made in the 7 years immediately before death. This allows gifts right up to the point of death to bring the value used for tapering below the £2M threshold.


Mary, an elderly widow, has an estate of £2.5M including her home that is worth £400,000. She gifts £500,000 cash to her children and dies 6 months later in January 2021. Although the failed PET is chargeable to IHT it is not taken into account for RNRB purposes. This means that, as her estate does not exceed £2M, the RNRB is available.

The reliance on future lifetime gifting is an uncertain way to plan to reduce the impact of the taper. Such gifts may fail to be made before an unexpected death.  And clients may lose the mental capacity to act. Even if a lasting or enduring power of attorney is put in place, this is unlikely to have the power to make substantial gifts.

It will also be necessary to consider any CGT implications if the gift involves chargeable assets.

Where joint assets are held that will exceed the taper threshold either on first or second death, individuals may wish to consider whether it is worth equalising the estate, and making gifts on first death. This could avoid the removal of the residence nil rate band and is sensible planning where assets are likely to appreciate in value faster than the frozen main IHT nil rate band.

Main actions:

  • Be aware that the value of assets that attract BPR such as AIM shares, and exempt transfers to spouses will be included in the estate to work out whether taper applies
  • Consider estate equalisation and altering the ownership of jointly held assets where the estate on second death is likely to exceed £
  • Where possible make lifetime gifts now, rather than waiting until the future where such gifts may not happen or even be possible.

5. Valuation issues – multiple properties, equity release

Where there is more than one property in the estate that is eligible for residence nil rate band relief, the LPRs can nominate one to qualify. Unused relief cannot be transferred to another property in the estate.


The value of the property that qualifies for RNRB is limited to the individual’s ‘material interest’ in a property. This may be limited where equity release is planned. 

Main actions:

  • Where there is more than one property that can qualify for RNRB, consider nominating the most valuable.
  • Keep LPRs informed of residence history in property so that they have facts to make a nomination.
  • Where equity release is considered, make sure impact on RNRB is factored in.

6. Claiming the RNRB

Like the transferable nil rate band the RNRB must be claimed within 2 years of the end of the month of death. This is done by the legal personal representatives, using the ‘Claim for residence nil rate band’ form (IHT 435). As in most cases, the RNRB will be claimed on second death, the LPRs will also need to complete the ‘Claim to transfer any unused residence nil rate band’ (IHT 436).


This will require the LPRs to have access to information about family relationships, residence ownership and history (particularly if there is a claim for downsizing relief, or LPRs make a claim to nominate one property rather than another qualifying home). The LPRs must submit details about the previously deceased spouse’s estate and marriage to claim both the transferable residential nil rate band and the main IHT nil rate band.

Main actions:

  • Ensure LPRs are aware of property transactions and residence history.

The residential nil rate band is a valuable but complex relief. Planning and good recordkeeping is at the heart of maximising its advantages.

Savvy Financial Planning, Hinton Business Park, Tarrant Hinton, Blandford Forum, Dorset, DT11 8JF