The new residence nil rate band in practice

The new residence nil rate band for inheritance tax comes into effect in April 2017. We look at how this will operate, and key factors to be considered when reviewing your wills and estate planning arrangements to secure these extra tax savings.

As explained in our September 2015 article, the new residence nil rate band (RNRB) comes into effect in April 2017. We now have the final form legislation and in this article we look in more detail at how this will operate, and factors to be considered when reviewing your wills and estate planning arrangements to ensure they are as inheritance-tax efficient as possible.

What is the Residence Nil Rate Band?

For deaths occurring after 5 April 2017, a new RNRB allowance will be available. This will mean that, together with the nil rate band (currently frozen at £325,000 until 2021), married couples will be able to leave assets with a value of up to £1 million free of inheritance tax (ignoring any other reliefs or exemptions). The allowance is being introduced in a staggered way and this, and the potential inheritance tax savings, are summarised below:


    Single person

    Married couple 

    Potential IHT saving 
    (for couple)

















This is clearly a valuable allowance - but, as ever, there are conditions to be met.

How do I secure the RNRB?

For the RNRB to apply, you must die owning a “qualifying residential interest” which needs to be “closely inherited”.

A qualifying residential interest, or QRI, is an interest in a dwelling house that was the deceased person’s residence at some time during their ownership of the residential interest, and that interest is still comprised in their estate immediately before death. If your estate includes two or more QRIs, your executors will need to elect one to qualify for the RNRB.

To be “closely inherited”, the QRI must either pass to a lineal descendant outright or on certain types of trusts. Lineal descendants are broadly defined to include children, step-children, adopted children, foster children, and children in relation to whom a guardian or special guardian has been appointed.

Total permitted estate value

If your estate exceeds £2 million, there will be a tapered withdrawal of the RNRB of £1 for every £2 over the £2 million threshold. This means the RNRB will not apply where (from 6 April 2020) the value of the deceased’s estate exceeds £2.35 million or, if there is a transferable RNRB available from a pre-deceased spouse, £2.7 million. These thresholds ignore inheritance tax reliefs so, for example, those with valuable business or agricultural interests, are unlikely to benefit from this allowance.

Is it possible to carry forward any unused RNRB?

It is possible to transfer unused RNRBs between spouses. In fact, even if the first spouse died before 6 April 2017, it may be possible to secure a carried forward RNRB as the following example shows.

Mr and Mrs Smith have two children. They jointly owned a property, which automatically passed to Mrs Smith when Mr Smith died in February 2015. His estate was worth £2.1 million and his half share of the house was valued at £500,000. Mr Smith’s executors cannot claim the RNRB because he died before 6 April 2017 and, in any event, the house was not closely inherited.

However, when Mrs Smith dies in May 2020, she leaves her estate to her two children in equal shares. At her death, Mrs Smith’s house is valued at £650,000 and the total value of her estate is £900,000. Mrs Smith’s personal RNRB is £175,000. She can also claim Mr Smith’s unused RNRB as a brought forward allowance.

However, she cannot claim 100 per cent of Mr Smith’s RNRB because, although he did not use any of it, his estate exceeded the £2 million allowance.

The legislation sets out a formula to calculate the transferable percentage, and assumes Mr Smith’s RNRB was £100,000. This works as follows:

£100,000 – (£2.1m - £2m) = £50,000 (ie, 50 per cent of the assumed £100,000) 

This percentage is then applied to the actual RNRB allowance at the date of Mrs Smith’s death, giving a brought forward allowance of £87,500 (50 per cent of £175,000). So Mrs Smith’s total RNRB is £262,500 - saving £105,000 of inheritance tax.

As with the nil rate band, there may be circumstances in which three or even four RNRBs are available to a married couple and careful planning will be needed to secure maximum benefit from these allowances.

What happens if I move to a less valuable home, or into a care home?

If you downsize to a less valuable property, or sell your home, the RNRB can still be available provided:

  • The downsizing occurs on or after 8 July 2015. 
  • You die after 6 April 2017. 
  • The property would have qualified for the RNRB had it been retained. 
  • The replacement residence, together with assets of an equivalent value to the “lost” RNRB are left to lineal descendants. 
  • You sell your property and the sale proceeds, or other assets of an equivalent value, are left to lineal descendants. 
  • You otherwise cease to own your property and other assets of an equivalent value are left to lineal descendants.

Do I need to change my will to utilise the RNRB?

Not necessarily but it would be sensible to review your will, any letter of wishes, and the value of your estate to see whether any steps can be taken to secure the maximum available RNRB, particularly if you have been widowed, or have children from a previous marriage.

If you make no changes to your will then, under the current law, it remains possible for your beneficiaries to enter into a deed of variation after your death effectively to change the terms of your will and ensure your QRI passes to descendants, securing the RNRB. Alternatively, if your will contains a trust, and the trust assets include a QRI, it may be possible for the trustees to make an appointment to secure the RNRB.

If you prefer, it is possible to make specific provision within a will to secure the RNRB. For maximum flexibility, a QRI equivalent in value to the maximum available RNRB can be left on discretionary trusts with an expression of wishes that the trustees exercise their powers to ensure the QRI is closely inherited.

In the case of married couples, if your home is your only QRI, you might consider whether it would be appropriate for children to receive an interest in it on the first death, or whether it would be better for the RNRB to be carried forward to the second death, so that the surviving spouse has sole ownership and security during their lifetime.

If the combined value of your estates is approaching £2 million then consideration should be given to equalising the ownership of assets. Where the combined value exceeds £2 million, thought might be given to “death bed” tax planning whereby assets would be transferred away from an unwell spouse to secure the RNRB on their death. However, this needs to be balanced against the loss of benefitting from a capital gains tax re-basing on the death of the unwell spouse, which can be a reason to transfer assets to them.

This is clearly a complex area, so it is sensible to review your current will and letter of wishes, asset values and asset ownership to ensure the maximum available RNRB can be utilised in your circumstances. You should also identify whether any carried forward RNRB might be available and take advice on how to secure this. Of course, asset values and family circumstances are also constantly changing, and your will should be reviewed when any significant changes occur to ensure it remains appropriate.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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