The Residence Nil Rate Band Taper on Estates Over £2 Million

Inheritance tax is charged at 40% on the value of an estate above the available thresholds. The standard nil rate band is £325,000, and below that figure there is normally no inheritance tax to pay. The residence nil rate band sits on top of it and is currently £175,000. Both figures are frozen, and the freeze now runs through the 2028/29 and 2029/30 tax years, which means these amounts hold until 5 April 2030 rather than rising with inflation as the legislation originally contemplated.

The additional band is not automatic. It applies where a residence that the deceased owned and lived in at some point passes to direct descendants on death. HMRC defines direct descendants as a child, grandchild or other lineal descendant, and also includes step children, adopted children, fostered children, children where the deceased was appointed guardian or special guardian, and the spouse or civil partner of a lineal descendant. It does not include nephews, nieces, siblings or other relatives. The home must pass to them under the will, under the rules of intestacy, or by some other legal means, and they must become entitled to it on the death.

That definition does more work than it appears to. An estate with no children or grandchildren, or one where the home is left to a sibling or a niece, gets no residence nil rate band at all regardless of its value. The broader framework around all of this is set out in our guide to Inheritance Tax Explained.

The taper threshold is £2 million. Where the estate is worth more than that, HMRC's guidance on the residence nil rate band states that the band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

The arithmetic follows from that. On an estate of £2.1 million, the excess is £100,000, so the band reduces by £50,000, leaving £125,000. On an estate of £2.2 million, the excess is £200,000, the reduction is £100,000, and £75,000 remains. By £2.35 million the full £175,000 has been withdrawn and the band is gone.

The marginal effect is the part worth understanding. Between £2 million and £2.35 million, each extra £2 of estate value both attracts inheritance tax at 40% and removes £1 of relief that would otherwise have been free of tax. The effective rate on value in that band therefore runs at 60% rather than 40%. For a couple, where two residence nil rate bands are in play on the second death, the same mechanism applies to £350,000 of relief and the band is fully withdrawn by around £2.7 million.

The threshold is tested against the value of the estate, and this is where people are caught by surprise. The figure used is the net value before reliefs and exemptions are applied. That means business relief and agricultural relief, which can remove large amounts of value from the taxable estate, do not keep that value out of the taper calculation. An estate holding a qualifying trading business can therefore face a tapered residence nil rate band even though the business itself attracts relief. Our note on Business Relief Explained covers how that relief operates in its own right.

Gifts made in the seven years before death are treated separately. They are not part of the estate for the purposes of the £2 million test, but they do consume the nil rate band before the rest of the estate is assessed. The interaction between lifetime gifting and the thresholds is covered in our guides to the seven year rule and gifts from surplus income, and the second of those is one of the more useful exemptions for people with income they do not spend.

Transfers between spouses and civil partners are normally exempt, so the first death often uses little or none of either band. Where that happens, the unused proportion can be claimed on the second death. For the standard nil rate band, any unused threshold can be added to the surviving partner's threshold. For the residence nil rate band, the transferable amount is calculated using the percentage of the band that went unused when the first of the couple died, rather than the cash figure that applied at the time.

Two points follow. The first is that the percentage basis means a band unused in a year when the figure was lower still transfers as a percentage, which protects the value. The second is that the claim has to be made, and it is not given automatically. Our guide to the spouse exemption explains how the exemption on the first death creates the position the second estate then relies on.

Importantly for estates near the threshold, the taper is tested on the second estate's own value. Two bands transferred into a single estate worth more than £2 million will both be tapered on that estate's value, so combining assets on the first death can increase the eventual withdrawal.

A residence nil rate band would otherwise be lost by anyone who sold the family home and moved into something smaller or into rented accommodation. The downsizing addition prevents that. Where a person sold, gave away or downsized to a less valuable home on or after 8 July 2015, where the former home would have qualified for the band had they kept it until death, and where direct descendants inherit at least some of the estate, an addition can be claimed. HMRC states that the amount will usually be the same as the band lost when the former home is no longer in the estate, and it cannot exceed the maximum that would have been available had the sale or downsizing not happened.

The addition is a claim with a deadline. The estate's personal representative must make it within two years of the end of the month in which the person died. Estates in this position are not unusual, particularly where a move into care has prompted a sale, and our note on paying for care covers the funding side of that decision.

From deaths on or after 6 April 2027, unused pension funds and pension death benefits are brought into the value of a person's estate for inheritance tax. Personal representatives will be liable for reporting and paying any inheritance tax due on them. The existing exemptions for death benefits passing to a surviving spouse or civil partner, and to registered charities, are being maintained.

The consequence for the taper is direct. A pension pot that has been deliberately left untouched as a wealth transfer vehicle will from that date count towards the estate value, and so towards the £2 million test. Estates that sit comfortably below the threshold today can cross it on that change alone, with the loss of relief that follows. We set out the detail in the 2027 pension inheritance tax changes. Whether anything should be done differently as a result depends entirely on individual circumstances, and it is a question where regulated advice may be appropriate.