What You Need To Know About The Residence Nil Rate Band

How you can pass your home to your children tax free

To reduce the tax burden, the main residence nil-rate band is an allowance that allows people to leave their homes to family tax-free.

In addition to the inheritance tax (IHT) standard nil rate band (currently £325,000), a residence nil rate band (RNRB) has been introduced from 6 April 2017. This is available when residential property is left to direct descendants.

If you're leaving your home to children or grandchildren, you can benefit from an additional £150,000 in tax-free allowance in the 2019-20 tax year. This is set to increase to £175,000 in April 2020.

You will qualify for this allowance if your estate includes a property that you've used as a home at some point in your life.

Inheritance tax property rates

The increase to the main residence nil-rate band is happening gradually between April 2017 and April 2020. The table below shows how your inheritance tax allowance will increase over the next few years.

From April 2019, you'll be able to pass on £150,000. Your spouse or civil partner has the same allowance, effectively doubling what you can pass on to £300,000.

The property allowance will be layered on top of your inheritance tax allowance, which has been set at £325,000 since 2010. This means that in 2019-20 you can pass on as much as £475,000 tax-free as an individual, or £950,000 as a couple.

After 2020, the plan is for the main residence nil-rate band to increase annually with inflation.

Who can inherit my property tax-free?

Only 'direct descendants' of people who have died can benefit from the new main residence nil-rate band.

Direct descendants are described as:

Children and their spouses or civil partners (to include adopted children)
Grandchildren and their spouses or civil partners
Great-grandchildren and their spouses or civil partners
Stepchildren and foster children
Children who were under the guardianship of the testator

This means that nephews, nieces, siblings and other relatives will not benefit from the new allowance

Which properties qualify for the nil-rate band?

The main residence nil-rate band applies to only one home that you have lived in at some time.

If you own more than one home, you executor can nominate which one should be used against the inheritance tax property allowance.

The good news is that you don't have to have lived in or owned the property for a minimum time – it can be any property you've lived in at some point.

Downsizing

People can downsize and still benefit from the residence nil-rate band.

The executors of your estate will need to work out what's technically known as your 'downsizing addition'. This is the amount of the main residence nil-rate band that you would have 'lost' by moving to a cheaper home.

The downsizing addition only applies if the value of your home when you die is worth less than the main residence nil-rate band at the time of your death.

The executors of your estate have two years following your death to claim your downsizing addition. It would be helpful to make a note of when you sold your home, and what was left after you downsized, so that your executors know exactly what to claim.

Estates worth more than £2m

If you have a larger estate, the main residence nil-rate band, reduces gradually, known as 'tapering'.

For every £2 that your estate is over £2m, the new property allowance is reduced by £1.

So, if your estate is worth £2.3m in the 2019-20 tax year, you'll lose the entire main residence nil-rate band.

The table below shows the size of estate when the entire nil-rate band is lost.

Inheritance tax on property FAQs

What if I'm not married?

If you're single and have a property in your estate, your heirs will benefit from the main residence nil-rate band.

This means you'll have the £325,000 nil-rate band, plus an extra £150,000 in 2019-20, rising to £175,000 in 2020.

But unmarried couples will not be able to inherit their partner's unused nil-rate bands which, in effect, doubles the amount that can be passed on.

By 2020, married couples and civil partners will be able to pass on £1m inheritance tax-free, whereas unmarried couples will only be able to pass on £500,000 each.

Married couples and civil partners can inherit from one another tax-free - this does not apply if you're unmarried.

Will this apply to a second home?

No. The extra property allowance only applies to your main home, although you are free to choose which property. It would be generally advisable to nominate your most valuable property as the main residence.

How does inheritance tax on overseas property work?

In most cases, any property you own overseas will count as part of your estate, so will be subject to the normal inheritance tax rules. In other words, you'll be charged 40% of assets worth more than £325,000.

The rules are different for non-domiciles (people who aren't UK residents for tax purposes), and depend on where they are based, but even they will need to pay UK IHT on their assets in the UK.

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