Inheritance tax threshold increased to £1m by 2020-21.

From 6 April 2017, a new inheritance tax Residence Nil Rate Band (RNRB) is available (in addition to an individual’s own nil rate band (NRB) of £325,000), conditional on the family home being passed down to direct descendants (eg children, stepchildren, grandchildren and/or their spouses).

Clearly, the threshold changes, decedents and ‘main residence’ requirements need to be considered as part of any IHT planning.

Maximum amount

It is phased in for deaths on or after 6 April 2017, at the maximum following amounts:


Maximum residence nil rate band









For later years, the maximum additional threshold will increase in line with the consumer price index.

The headline £1m inheritance tax threshold is reached by a married couple or civil partners by combining their nil rate bands and their residential nil rate band (2X NRB of £325,000 plus 2x RNRB of £175,000).

The existing nil rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

Tapering the residence nil rate band

There is a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2m. The withdrawal rate is £1 for every £2 over this threshold.

While the relief is calculated by reference to the value of the residential property transferred on death, it is applied across all of the chargeable estate.

The value of the estate is the total of all the assets in the estate less any debts or liabilities. When you work out the value of the estate for taper purposes, you do not deduct exemptions such as spouse exemption, or reliefs such as agricultural or business property relief. However, you ignore assets that are specifically excluded from IHT (excluded property).

Qualifying property

Only one residential property will qualify. It will be up to the personal representatives to nominate which residential property should qualify if there is more than one in the estate.

The residential property must have been occupied by the individual as a residence at some time, but does not need to have been their main residence. It is possible to choose which property obtains the relief via an election. A property which was never a residence of the deceased, such as buy-to-lets, cannot be nominated.

The additional nil rate band is also available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct descendants.

In those circumstances the RNRB will still be available, provided that:

a)    The property disposed of was owned by the individual and it would have qualified for the RNRB had the individual retained it

b)    The replacement property and/or assets form part of the estate and pass to descendants.

Unused additional threshold

For deaths prior to 6 April 2017, the surviving spouse will be able to claim the deceased person’s RNRB (as it would have been impossible for them to use it). So 100% of the additional threshold will be available for transfer unless the value of their estate exceeded £2m and the additional threshold is tapered away.

It is the unused percentage of the additional threshold that is transferred, not the unused amount. This is transferred in a similar way to the existing basic Inheritance Tax threshold. This ensures that if the maximum amount of additional threshold increases over time, the survivor’s estate will benefit from that increase.

It does not matter when the first of the couple died, even if the death occurred before the additional threshold was available.

Residence nil rate band and gifts

The additional threshold only applies to the estate of a person who has died. It does not apply to gifts or other transfers made during a person’s lifetime. This includes gifts that become taxable because they have been made within seven years of a donor’s death.

Where someone gives away their home and continues to benefit from it, for example, by living in the property, HMRC treats that home as being included in the estate (gift with reservation). So the additional threshold may be available for that home if it is given away to a direct descendant.

Residence nil rate band and trusts

The residence nil rate band may be lost if the property is placed into a discretionary will trust for the benefit of the children or grandchildren.

However, if the trust gives a child or grandchild an absolute interest or interest in possession in the property, the RNRB can still be claimed. The important point to note is that the trustees must use their discretionary powers within two years of the date of death to make the best use of the RNRB.

Other trusts such as Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts will also retain the additional nil rate band.

IHT planning

Those whose estates exceed £2m could consider making lifetime gifts, if appropriate, to bring their estates below the threshold. However, it will be necessary to consider the capital gains tax implications.

If a surviving spouse is the beneficiary of a life interest trust it may wish to check that the children will benefit on her/his death so as to qualify for the allowance.

For further guidance including case studies please see HMRC guidance

Article from ACCA In Practice