Home / The Rix & Kay Blog / Residence Nil-Rate Band
Bruce Clarke

Partner - West Kent (Hadlow)

The residence nil-rate band was introduced with effect from 6th April 2017 as a result of the promise in 2015 by George Osborne to introduce a £1m inheritance tax free allowance. The introduction of the residence nil-rate band has provided married couples and those in a civil partnership with a greater opportunity to minimise inheritance tax on their death but the relief itself is far from straightforward.

The relief

The principle is that by 6th April 2020, married couples and civil partners who leave their home to their children will have an inheritance tax free threshold of £1m. In theory, this sounds relatively straightforward but there are a number of complexities which make it anything but.

The relief works by giving each person an additional allowance (which started at £100,000 from 6th April 2017 and has increased by £25,000 each year up to the ceiling imposed of £175,000 with effect from 6th April 2020) on top of the ‘normal’ nil-rate band (currently £325,000). As with the nil-rate band, it is possible to transfer any unused residence nil-rate band between married couples and, subject to satisfying certain conditions, on the death of the survivor of a married couple, there is potentially £1m which can be passed on inheritance tax free.
However, as with all reliefs, there are conditions.

Qualifying residential interest

To qualify for the additional allowance, the deceased’s estate must include a ‘qualifying residential interest’. Essentially, this is an interest in a house that was the deceased’s residence at some point during their ownership. It is important to note that if a person owns multiple properties at their death, only one property can qualify and that person’s executors must choose which property (normally the most valuable).

What qualifies as a residence for these purposes is based on the tests used when establishing principal private residence relief for Capital Gains Tax purposes.

The qualifying residential interest must be ‘closely inherited’

It is not enough to simply own a property that has been used as a residence at some point. That property must be ‘closely inherited’. This means that the property must pass to lineal descendants. Although lineal descendants are not specifically defined in the legislation, this is accepted as including children, grandchildren and remoter descendants; but would exclude wider descendants such as nephews and nieces. However, step-children and adopted children are included.

How the property is ‘inherited’ is where the first complexity comes in. Whilst it is clear that if the property passed to a child outright, for example, this will be ‘closely inherited’, it is also possible for the property to be treated as ‘closely inherited’ if the property passes into certain qualifying trusts, such as an ‘immediate post death interest’. To complicate matters even further, there is a quirk in the legislation that needs to be borne in mind when grandchildren are named as potential beneficiaries subject to satisfying an age contingency which, if not dealt with correctly, may mean the residence nil-rate band is not available.

Restriction of the relief for estates valued at £2m or more

Where the estate is worth £2m or more, the relief tapers away. The current threshold of £2m is fixed until 5th April 2021 but is set to increase in line with the Consumer Prices Index thereafter.
For every £2 above the £2m threshold, the relief reduces by £1. For example, if an estate was valued at £2,200,000, the relief would be reduced by £100,000.

When working out the value of the estate for these purposes, it is necessary to include any interests in trusts that the deceased benefited from during their lifetime, jointly owned assets and gifts with a reservation of benefit; and reliefs or exemptions are ignored potentially meaning that, without careful planning, those with estates worth more than £2m may find the extent to which the residence nil-rate band is available to them is restricted.


The legislation provides for situations where a person downsized from a more valuable property or ceased to own residential property altogether on or after 8th July 2015. The conditions to be satisfied here are quite complex and, again, without careful planning, individuals may find their ability to use the residential nil-rate band restricted.


As with all estate and tax planning, careful consideration needs to be given to the interaction of the tax planning with the estate planning, particularly where the estate planning involves the use of trusts. Whilst in some instances it will be possible for trustees to utilise ‘reading back’ provisions within the legislation to make use of the residence nil-rate band, this may result in a situation which does not quite meet with the testator’s original estate planning objectives. It is much better to plan as early on as possible if an individual wants to achieve a balance between estate planning and tax planning.

The legislation concerning the residence nil-rate band is still relatively young and will no doubt develop over time. However, it is a complex piece of legislation that, used correctly, could potentially result in significant inheritance tax savings. If you would like to speak to someone about how the residence nil-rate band affects your estate, please contact Bruce Clarke, Partner in our Private Client team.