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Prior to the 2010 election David Cameron promised to raise the inheritance tax threshold to £1m.  More than five years later, this promise was delivered in the form of the residence nil-rate band (RNRB) which comes into effect next year.  Reaction to the new regime has been mixed, much criticism being levelled at the restrictive scope of the relief as well as its complexity.  In this note we take a look at the ambit of the RNRB and consider a number of tips and traps, as well as some planning points, which should be taken into account if full advantage is to be taken of the new regime.

What is the RNRB?

In broad outline, from 6 April 2017, the RNRB will be available for residences inherited by direct descendants (see below) in addition to the existing nil-rate band (NRB) which is currently £325,000.  The RNRB will be phased in from 2017/18 when it will be £100,000, increasing by £25,000 each year until 2020/21 when it reaches £175,000.  As with the NRB, any unused RNRB can be transferred to a surviving spouse or civil partner, with the effect that the maximum combined IHT threshold for such couples will be a total of £1m by 6 April 2020.

In what circumstances does the RNRB apply?

The application of the RNRB is complex but, in basic terms, the RNRB may be available where:

  • an interest in a property which has been used as a residence by an individual (and/or its sale proceeds)
  • is left on his death
  • to or for the benefit of his direct descendants and
  • the value of the deceased's estate is within a permitted range of values.

Some tips and traps

1.  The RNRB only applies to transfers on death, not during lifetime 

Consequently it will not apply to lifetime gifts when the donor dies within seven years.  However, the RNRB will be available for property treated as being part of the deceased’s estate because he has made a lifetime gift but retained some benefit from the gifted property.

2.  The property does not need to be left by will

The RNRB may also apply on intestacy or where joint property passes by survivorship.

3.  It is not necessary for the property to have been the deceased’s main residence (or his residence at the time of his death)

Instead, it is sufficient that it has been used as his residence at some point during his ownership.  

4.  The RNRB is only available in relation to one property

If the deceased had more than one residence, his personal representatives can nominate which is to benefit from the RNRB.

5.  ‘Direct descendant’ is defined widely

It includes stepchild, adopted child and foster child.  It also includes the spouse or civil partner, or a widow/widower or surviving civil partner who has not remarried, of a direct descendant.

6.  Certain trusts for direct descendants will not qualify for the RNRB

If a property is left on trust for direct descendants, the RNRB will be available only in limited circumstances, for example where they have a right to trust income, or the property is left on particular favoured trusts for children, or on a disabled person's trust.  No RNRB will be available for trusts outside these limited exceptions, such as discretionary trusts or trusts for grandchildren who do not receive the property outright on the deceased's death, unless it is possible to use a deed of variation or trust appointment to 're-write' the trust terms.

7.  The RNRB may also be available if the deceased was a trust beneficiary

The allowance may be available in certain circumstances where a deceased had a right to use a property held in trust and on his death someone receives the property outright.

8.  The RNRB will be tapered away for estates over £2m

As a result in 2017/18, an estate over £2.2m will not benefit from the RNRB at all.  When the relief reaches £175,000 in 2020/21, the cut-off will apply to estates over £2.35m. 

9.  Unused RNRB may be transferred to a surviving spouse or civil partner

This will be possible even if the first spouse or civil partner to die did not own a residence and also where the first death occurs before 6 April 2017.

10.  The RNRB may still be available if the individual has downsized. 

Finance Act 2016 legislation extends the availability of the RNRB to those who downsize (or cease to own a home) after on or after 8 July 2015, provided that their direct descendants are left some of their estate outright or on permitted trusts.

Planning points

  • The value of an estate should be kept under review in light of the taper threshold of £2m.  Remember that, for this purpose, the value of the estate is calculated net of debts, but any reliefs or exemptions are not deducted.
  • Avoid 'bunching' of a couple's estates where this will mean that the taper threshold is exceeded on the second death.  In such a case consider leaving property on trust for the survivor (instead of direct to them).
  • Take care that a mortgage does not reduce the net value of a home below the amount of the available RNRB.
  • If a residence is to be left on trust for direct descendants, the trust terms must be considered carefully to ensure that the RNRB will be available.
  • Those who wish to rely on the downsizing rules will need to keep careful records of the proceeds of sale (or of the property value at the date of a gift) so that the ‘lost’ RNRB may be ascertained at the relevant time.


Although the introduction of the RNRB is good news for taxpayers, its scope is fairly restricted.  In particular, the fact that it will only be available to those who leave a residence to direct descendants and the application of the taper threshold for estates over £2m will mean that it has limited relevance for some taxpayers.  However, as the government has confirmed that the NRB will be frozen at £325,000 until at least 5 April 2021, it will be important for individuals to take advantage of this new relief where it is available to them.  Such individuals should carry out a careful review of the organisation of their estates and the terms of their wills, especially where a residence is to be left in trust, to ensure that they gain the maximum benefit from the RNRB. 

If you require further information on anything covered in this briefing please contact Diana Davidson ([email protected] / 020 3375 7338), Christine Payne-Smith ([email protected] / 020 3375 7464) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Private Wealth Matters page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2016

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