A pre-election promise of a £1 million nil rate band for inheritance tax has begun to be implemented, but only in stages and only if certain circumstances prevail, as this article explains

 “You can pass up to £1 million on to your children free of inheritance tax. No more inheritance tax on family homes.”

The 6 April 2017 saw fruition of former Chancellor George Osborne’s announcement at the 2015 summer Budget of the introduction of a residence inheritance tax (IHT) nil rate band (RNRB). This appeared from the headlines to be the Conservatives making good on their pre-election pledge to increase the IHT NRB to £1 million. If only it were that simple.

The opportunity for your clients to pass up to £1 million of their estates IHT-free will be available in certain circumstances. But the position could become very complicated and will depend on a number of factors, including your clients’ marital status, whether or not they have children, the value of their interest in the family home, the value of their total estate on death, who inherits the family home and, ultimately (and rather more difficult to predict), the time of their demise.

What is the RNRB?

The RNRB will act as a top-up to the current IHT NRB (£325,000 in 2017-18), and will work in a similar manner by reducing the value of an individual’s estate that is subject to IHT at the full rate of 40%. It will be introduced for deaths on or after 6 April 2017 where, in general terms, an interest in the family home is left under a will to an individual’s children, grandchildren or other lineal descendants. The RNRB will be set off against the value of the deceased’s estate ahead of the NRB.

Who will qualify for the RNRB?

An individual’s estate at the time of death must in general include an interest in a dwellinghouse which they have occupied or intended to occupy as their home during their lifetime (e.g. the family home). The value of an interest in, for example, a buy-to-let property will not qualify. Where someone owns an interest in more than one qualifying property their executors will be able to nominate the property which should benefit from the RNRB. It will not be possible for the RNRB to be spread over the value of more than one property.

In order to qualify for the RNRB, the interest in the family home must be “closely inherited” by direct lineal descendants, i.e. children (including stepchildren, adopted children, foster children), grandchildren, etc. Interests in the family home left to spouses or civil partners of direct lineal descendants will also potentially qualify. The RNRB will not, however, be available to those who do not have children, for example an uncle looking to leave his family home to his nephews and nieces.

The RNRB may still be available where an interest in the family home becomes held in trust under the deceased’s will, but this will depend in practice on the type of trust and the beneficiaries of the trust satisfying the “closely inherited” test. An interest in the family home left, for example, to a discretionary trust may not qualify for the RNRB even where the potential beneficiaries are the deceased’s children.

How much RNRB will be available?

The maximum amount of RNRB will be £100,000 on a death in the 2017-18 tax year. The RNRB will then increase by £25,000 each year until it reaches £175,000 in the 2020-21 tax year. In subsequent tax years the RNRB will rise in line with annual increases in the consumer price index.

At its simplest, in 2020-21 when the full RNRB is in play, a married couple or civil partners would not pay IHT on £325,000 + £175,000 = £500,000 x 2 spouses/civil partners = £1 million where the RNRB applies.

There will, however, be a tapered reduction of the RNRB where the net value of the assets held in an individual’s personal estate at the time of death is over £2 million. In that situation the maximum available RNRB will be reduced by £1 for every £2 the net estate is valued in excess of £2 million. This means that for a death in the 2017-18 tax year (when the maximum available RNRB will be £100,000) there will be no RNRB available where the deceased’s net estate is worth over £2.2 million. The RNRB will only apply to the net value of an interest in the family home. Where an interest in the family home is subject, for example, to an outstanding mortgage or equity release scheme at the time of death, this debt will require to be taken into account when calculating the level of the RNRB.

Another restriction is where the value of the deceased’s interest in the family home is below the available RNRB. Where, for example, an interest in the family home is only worth, say, £150,000, the remaining RNRB of £25,000 for a death in the 2020-21 tax year will not be available to reduce the IHT payable at 40% on other assets in a taxable estate. 

What will happen to any unused RNRB?

Where there is a surviving spouse or civil partner, it may be possible for any unused RNRB to be available as a “brought forward allowance” and utilised on the death of the survivor, when calculating the IHT on the family home, as each spouse or civil partner is entitled to a RNRB.

This will work in a similar manner to the usual transferable IHT NRBs. The surviving spouse or civil partner’s RNRB will be increased by the proportion of the unused RNRB following the first death. This will result in up to a doubling of the RNRB on the death of the surviving spouse or civil partner. The ability to transfer unused RNRB will not extend to unmarried couples with children. In these circumstances, an unmarried couple would have to consider leaving their interest in the family home to their children on the first death in order to avoid the individual’s entitlement to the RNRB being lost.


  • Ken and Barbie are married with children. Ken and Barbie’s jointly owned estate is worth £1 million and includes a family home worth £500,000.
  • Ken dies in December 2016 and leaves everything to Barbie. The value of Ken’s personal estate is below the taper threshold of £2 million and therefore 100% of his RNRB will be available on Barbie’s death.
  • 100% of Ken’s IHT NRB will also be available since he left everything to Barbie and this will qualify under the IHT inter-spouse transfer exemption. There will therefore also be £650,000 (2 x £325,000) of NRB available on Barbie’s death.
  • Barbie intends to leave their £1 million joint estate to their children on her death.

The IHT position on Barbie’s death will depend on in which tax year she dies: see table.

The £1 million taxed at 0% which was promised will therefore only ultimately become potentially available on the death of a surviving spouse or civil partner on or after 6 April 2020, and requires ownership of a house valued at £350,000 at least.

What happens when the family home is sold before death?

New rules ensure that individuals who downsize from their family homes may still benefit from the RNRB. The RNRB will, however, only potentially continue to be available in these circumstances if they disposed of an interest in the family home on or after 8 July 2015 and either:

  1. replaced it with a family home of lesser value; or
  2. did not replace it, but still hold assets of an equivalent value in their estate which are left to their children or direct lineal descendants.

This concession aims to prevent older couples feeling forced to hang on to their family home purely to save IHT by virtue of the top-up RNRB, and also so that individuals who move into care are not penalised.

What will the RNRB mean in practice?

The RNRB should be welcomed in that it should, in theory, enable those who own an interest in their family home to pass on a larger part of their estates to their children IHT-free. An unmarried or divorced person could ultimately leave up to £500,000 of assets (including an interest in the family home worth at least £175,000) without triggering an IHT liability. For a married couple or civil partners, the IHT-free figure becomes £1 million (including a family home worth at least £350,000).

The biggest winners will be married couples or civil partners who are homeowners who leave all their assets to each other and ultimately to their children under their wills. This is the strategy that is adopted by the vast majority of married couples with children. No further action should in theory require to be taken in these circumstances to maximise the availability of the RNRB, subject to being aware of the tapered reduction in the RNRB where the deceased’s personal estate is worth over £2 million. It may be possible to minimise the impact of the taper rules through lifetime planning to reduce the value of the personal estate on death.

On the other hand, the “closely inherited” test means that only those with children or other direct lineal descendants will potentially benefit from the RNRB. The IHT NRB will remain at its current level of £325,000 until at least the 2020-21 tax year, which will be an even bitterer pill to swallow for individuals and couples who will not qualify for the RNRB as a result of not having any children of their own through choice, medical reasons or otherwise.


The introduction of the RNRB will unfortunately add an additional layer of complexity to the existing IHT rules, which could have been prevented by simply increasing the current IHT NRB. An increase in the IHT NRB would have ensured that everyone would potentially benefit, rather than only individuals with both an interest in a family home and children or other direct lineal descendants being able to benefit from the RNRB.

Solicitors looking to maximise the benefits of the RNRB for their clients should be considering the terms of their clients’ wills to ensure that they continue to be tax efficient in light of the new rules, and also whether or not their clients should be undertaking any lifetime estate planning (such as equalisation of estates, lifetime gifting, etc) to help minimise the IHT exposure.


Tax year Estate £000s RNRB £000s NRB £000s Total £000s Net estate £000s IHT (@40%) £000s
2016-17 1,000 Nil 650 650 350 140
2017-18 1,000 200 650 850 150 60
2018-19 1,000 250 650 900 100 40
2019-20 1,000 300 650 950 50 20
2020-21 1,000 350 650 1,000 Nil Nil
The Author
Martin Campbell, partner, Anderson Strathern
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