From April 1995 to April 2009, basic Inheritance tax (IHT) thresholds used to rise each year. Since then, they have been static until April 2028, estimated. This means more and more people are paying, especially due to the increasing value of their homes.
IHT can be paid in instalments, though it incurs an interest rate of a whopping 7.50% and Interest on Repayments of 4%. Before 2020, the approximate average was 3%
The following article is reproduced under open government licence V3.0 as of 5th August 2024
Add the residence nil rate band to the basic Inheritance Tax threshold if the person and their estate meet the qualifying conditions. This higher threshold does not mean that the home is exempt from Inheritance Tax but that can be the result in some cases. Additional residence nil rate band may also be available from a late spouse or civil partner’s estate.
Usually, the order you apply the residence nil rate band and basic Inheritance Tax threshold will make no difference. However, in some cases it will affect the amount of any unused additional or basic Inheritance Tax threshold available to transfer to a spouse or civil partner’s estate.
A man dies in the tax year 2020 to 2021 and leaves to his children:
The maximum available residence nil rate band in the tax year 2020 to 2021 is £175,000.
| residence nil rate band for the estate | £175,000 (the lower of £300,000 and £175,000) |
| basic Inheritance Tax threshold | £325,000 |
| estate value | £490,000 |
| less residence nil rate band | - £175,000 |
| remaining value | £315,000 |
| less basic Inheritance Tax threshold | - £315,000 |
| amount that Inheritance Tax is due on | £0 |
The full residence nil rate band has been used up, but the unused £10,000 out of the basic Inheritance Tax threshold of £325,000 would be available to transfer to the man’s wife.
The home inherited by direct descendants does not have to be worth more than the basic or transferred basic threshold, to get the residence nil rate band. You apply the residence nil rate band to the whole taxable estate, not just to the value of the home, so the whole estate shares the benefit of the tax-free residence allowance. If the home is worth less than the maximum available residence nil rate band, you cannot set the unused amount against the other assets in the estate. But, the unused amount would be available to transfer to their spouse or civil partner’s estate when they die and leave a home to their direct descendants.
A woman dies in the tax year 2020 to 2021 leaving:
The maximum available residence nil rate band in the tax year 2020 to 2021 is £175,000.
| residence nil rate band for the estate | £100,000 (the lower of £100,000 and £175,000) |
| basic Inheritance Tax threshold | £325,000 |
| estate value | £500,000 (the £500,000 left to the husband is exempt) |
| less residence nil rate band | - £100,000 |
| remaining value | £400,000 |
| less basic Inheritance Tax threshold | - £325,000 |
| amount that Inheritance Tax is due on | £75,000 |
The maximum possible residence nil rate band for this estate was £175,000, but the flat left to the son is only worth £100,000. So only £100,000 of the tax-free residence allowance applies. The remaining residence nil rate band of £75,000 is available to transfer to the husband’s estate. There’s no unused basic Inheritance Tax threshold to transfer.
Unlike the basic Inheritance Tax threshold, the residence nil rate band does not apply to gifts and lifetime transfers, such as:
A woman dies in tax year 2020 to 2021 and leaves to her daughter:
During the 7 years before she died she gave assets worth £100,000 to her nephew. The maximum available residence nil rate band in tax year 2020 to 2021 is £175,000.
| residence nil rate band for the estate | £175,000 (the lower of £200,000 and £175,000) |
| basic Inheritance Tax threshold | £325,000 |
Set the basic Inheritance Tax threshold of £325,000 against the value of the lifetime gifts of £100,000:
| taxable lifetime gifts add up to | £100,000 |
| less basic Inheritance Tax threshold | - £100,000 |
| amount that Inheritance Tax is due on | £0 |
This leaves £225,000 of the basic Inheritance Tax threshold to use against the estate.
| estate value | £450,000 |
| less residence nil rate band | - £175,000 |
| remaining value | £275,000 |
| less remaining basic Inheritance Tax threshold | - £225,000 |
| amount that Inheritance Tax is due on | £50,000 |
The basic Inheritance Tax threshold applies to any lifetime transfers and any gifts made in the 7 years before someone dies. But the residence nil rate band does not. So the basic Inheritance Tax threshold could be completely used up by those transfers and gifts. But any residence nil rate band would still be available to reduce the tax on the estate.
A man dies in tax year 2020 to 2021 leaving to his granddaughter:
He made gifts of £700,000 to his other grandchildren and nephew during the 7 years before he died. The maximum available residence nil rate band in 2020 to 2021 is £175,000.
| residence nil rate band for the estate | £175,000 (the lower of £500,000 and £175,000) |
| basic Inheritance Tax threshold | £325,000 |
Take away the basic Inheritance Tax threshold of £325,000 from the lifetime gifts of £700,000:
| lifetime gifts | £700,000 |
| less basic Inheritance Tax threshold | - £325,000 |
| value of gifts that Inheritance Tax is due on | £375,000 |
The lifetime gifts use up the basic Inheritance Tax threshold. So you pay Inheritance Tax on £375,000 worth of the gifts. But the residence nil rate band is still available to take off from the estate value:
| estate value | £750,000 |
| less residence nil rate band | - £175,000 |
| estate value that Inheritance Tax is due on | £575,000 |
For married couples and civil partners, you look at the position for each person’s estate separately when each dies. This would include each person’s share of the home if it’s owned jointly.
For residence nil rate band purposes the direct descendant is:
This also includes:
The person who inherits the home does not have to be under 18. A person’s step-child is only someone whose parent is, or was, the spouse or civil partner of that person. Direct descendants do not include nephews, nieces, siblings and other relatives who are not included in the list above. One or more direct descendants of the person that’s died can inherit a home, or a share of it .For a home left to people who are a mixture of direct descendants, other relatives or other people, you must share the value of the home in proportion to the share of the property each direct descendant inherits.
A woman dies in tax year 2020 to 2021. Her estate includes a home worth £500,000.In her will she leaves half of the property to her step-son and half to her nephew. You work out the residence nil rate band based on the value of the property left to the step-son (£250,000). But the actual residence nil rate band for the estate is restricted to £175,000. This is the lower of the maximum residence nil rate band for tax year 2020 to 2021 (£175,000) and value of the half share of the home (£250,000).
For homes that qualify for the residence nil rate band, there are rules about how the direct descendants inherit a home. The home must be left to them:
The home does not have to be specifically mentioned in the person’s will. It can be inherited as part of what’s left of the estate (the residue) after taking specific legacies into account. The residue of the estate is what’s left after payment of:
Where the home forms part of the residue and the residue has passed on to a number of different people, HMRC treat each of them as inheriting a proportion of the home. For the residence nil rate band, inheriting the home only counts if the direct descendants become entitled to the home when the person dies. For example, if the will has a condition that the grandchildren have to reach a certain age before they can inherit the home, the property is held in a trust, so the residence nil rate band will not apply. This is because the grandchildren do not inherit the home at the time that their grandparent dies. If the home is held in a trust before a person dies and it stays in trust when they die, the home will only qualify for the residence nil rate band if it becomes part of the direct descendant’s estate after the person dies. The actual home does not have to end up in the hands of the direct descendants. An estate could still be eligible for the residence nil rate band if the estate’s personal representative sells the home as part of the administration of the estate and passes the sale proceeds to the direct descendants. In the same way, once the direct descendants have inherited the home, there are no restrictions on what they can do with it. An estate will still qualify for the residence nil rate band, even if the direct descendants decide to sell the home after they’ve inherited it.
A woman died in tax year 2019 to 2020 leaving her house worth £500,000 to her 3 grandchildren as part of the residue of her estate. The maximum available residence nil rate band in tax year 2019 to 2020 is £150,000.The 3 grandchildren do not want to keep the property jointly. The estate’s personal representative sells the property and distributes the sale proceeds between the 3 grandchildren. As the home passes to the grandchildren under the terms of Jocelyn’s will, the residence nil rate band of £150,000 will be available. The direct descendants can also inherit the home if it’s left to them as a result of amending the will by a deed of variation. The deed of variation replaces the terms of a will, so the outcome of the deed is considered, rather than the wording of the will.
A home, or a share of one could be either:
The availability of the residence nil rate band will depend on the type of trust.This is because the type of trust will affect whether HMRC treats:
The residence nil rate band will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants. The residence nil rate band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.
A man dies in the tax year 2018 to 2019 leaving an estate worth £2,100,000 to his children. This includes a home worth £450,000.The maximum residence nil rate band in the tax year 2018 to 2019 is £125,000.The estate is worth more than the taper threshold of £2 million by £100,000.The residence nil rate band tapers away by £1 for each £2 that the estate is more than the taper threshold. So the residence nil rate band reduces by £50,000:
| residence nil rate band | £125,000 (lower of £450,000 and £125,000) |
| less amount of taper | - £50,000 |
| net residence nil rate band for the estate | £75,000 |
If his estate was worth £2,250,000 or more, the residence nil rate band of £125,000 would taper away completely. The value of the estate for taper purposes is the total of all the assets in the estate less any debts or liabilities. When you work out how much the estate is worth, do not take off any:
Ignore assets that are specifically excluded from Inheritance Tax.
Tapering can also reduce the amount of residence nil rate band available to transfer to a surviving spouse or civil partner, even if no residence nil rate band is used when the first of the couple dies. You calculate the amount of transferred residence nil rate band that the survivor’s estate can claim using the percentage of residence nil rate band that was not used when the first of the couple died. If the estate of the first of the couple to die is worth more than £2 million, tapering will reduce the amount of the unused residence nil rate band in that estate. This in turn reduces the amount of residence nil rate band that is transferable to the surviving spouse or civil partner’s estate.
A man dies in the tax year 2018 to 2019 leaving an estate worth £2,100,000. He leaves:
The maximum residence nil rate band in the tax year 2018 to 2019 is £125,000. But as his children do not inherit the home, his estate cannot use any residence nil rate band. Without the effect of tapering, he would have unused residence nil rate band of £125,000.But his estate is worth more than the taper threshold of £2 million by £100,000. The residence nil rate band available to his estate tapers by £1 for each £2 over the taper threshold. So the residence nil rate band reduces by £50,000.If he had left his home to his children, the residence nil rate band would have been £75,000 (£125,000 less £50,000). So the amount of his unused residence nil rate band is £75,000.The percentage of unused residence nil rate band in his estate is:
| unused residence nil rate band | £75,000 |
| divided by maximum residence nil rate band in the tax year 2018 to 2019 | ÷ £125,000 |
| percentage of unused residence nil rate band | 60% |
The man’s wife dies in tax year 2020 to 2021, when the maximum residence nil rate band is £175,000.She has an estate worth £1.8 million, including her home worth £500,000. She leaves all of this to her children.The amount of residence nil rate band available to transfer to her estate is:
| maximum residence nil rate band in tax year 2020 to 2021 | £175,000 |
| multiplied by the unused percentage | x 60% |
| residence nil rate band to transfer | £105,000 |
So her estate qualifies for £175,000 residence nil rate band based on her estate, plus a further £105,000 transferred residence nil rate band from her husband’s estate, to give a total residence allowance of £280,000.
HMRC cannot:
In some less straightforward situations you may want to get professional advice about:
