The Residence Nil Rate Band, and How to Lose It

Losing the residence nil rate band does not feel like anything at the time. It surfaces months later, when the executors find an allowance worth £175,000 has gone and the family owes £70,000 more tax than expected. Across a couple, £140,000. The allowance is generous; the conditions are narrow, and several are easy to fail without noticing. The wider picture is in Inheritance Tax Mitigation.

What it is, and what it is worth

The residence nil rate band (RNRB) is an extra Inheritance Tax allowance for leaving your home, or a share of it, to children, grandchildren or other direct descendants. It sits on top of the ordinary nil rate band, the £325,000 every estate gets.

• £175,000 per person, for deaths on or after 6 April 2017.
• £500,000 per person, with the nil rate band added.
• £1 million for a couple, where both allowances are unused on the first death and the home passes to descendants.

A point on the freeze, because you will see two dates quoted. Budget 2025 fixed both bands and the £2 million taper threshold for a further year, and section 72 of the Finance Act 2026 made it law. A single provision covers both bands, so they cannot part company: both run to 5 April 2031. HMRC's threshold table still shows 5 April 2030 for the residence nil rate band. That is an error on the page rather than a different rule, and the legislation settles it.

The conditions, spelled out

1. A home the person actually lived in

There must be a qualifying residential interest: a home in the estate they lived in while they owned it. A buy to let they never lived in does not count, and only one property can qualify, so the executors nominate one.

2. The home must be "closely inherited" by direct descendants

This is the condition that catches people. The legal definition of a direct descendant is wider than most expect in places, and much narrower in others.

Who counts:

• Children, grandchildren, great-grandchildren and remoter lineal descendants.
• Step-children, who stay step-children for this purpose even after the marriage that created the relationship has ended.
• Adopted children, who also remain the children of their birth parents, so a home from either qualifies.
• Foster children, and children you were appointed guardian or special guardian for if the appointment took effect while they were under 18.
• The husband, wife or civil partner of anyone above, including their widow or widower if that descendant died first, provided they have not remarried before your death.

Who does not count: nieces, nephews, brothers, sisters, parents, cousins, friends and unmarried partners. HMRC's manual is plain that property passing to them is not "closely inherited" (IHTM46013). Leave the house to a much loved niece and there is no allowance.

How trusts lose it, and how they keep it

This is where most accidental losses happen, because a trust that is excellent for every other purpose can be fatal for this one. Under section 8J of the Inheritance Tax Act 1984, where the home goes into trust on death, a descendant only counts as inheriting it in a few cases.

Structures that keep the allowance

• An outright gift to a direct descendant, specifically or through the residue.
• A bare trust, where a child is absolutely entitled and someone else merely holds the legal title. Bare trusts are not settled property for Inheritance Tax.
• An immediate post-death interest or a disabled person's interest for a direct descendant. The first is a life interest arising under the Will, putting the home into that person's estate.
• A bereaved minor's trust or an 18 to 25 trust for a direct descendant. It must be made by the Will of the child's own deceased parent, so a grandparent's Will cannot create one.
• An immediate post-death interest for a surviving spouse, the usual answer in a second marriage. The first person's allowance transfers, and the home sits in the survivor's estate. See Flexible Life Interest Trusts, Right to Occupy and Estate Planning for Blended Families.

Structures that lose it

• A discretionary trust holding the home. Nobody becomes beneficially entitled to the house on death, so nobody inherits it for this purpose. This is the commonest way it goes.
• A gift with a condition attached. "To my grandchildren when they reach 25" holds the home subject to a contingency, so they do not inherit at the date of death and HMRC says plainly the allowance does not apply.
• An appropriation by the executors. Where the Will left the home to a mix of descendants and others, handing the whole house to a child later does not fix it, because an appropriation is not a disposition (IHTM46033).

The two year rescue

There is a way back. Under section 144, if the trustees appoint the home out to the children within two years of the death, and before any immediate post-death interest or disabled person's interest has arisen, the Act treats the Will as though it had always said so, and the home is closely inherited. Two years sounds generous. It is not, when a family is grieving and probate is slow. See Residuary Discretionary Trusts and Estate Administration.

Lifetime arrangements are different. The allowance applies to your estate on death, not to lifetime gifts or transfers into trust, and where a home sits in a lifetime trust the answer turns on the type of trust and whose estate the home forms part of. Ask your adviser about your own arrangements.

The £2 million taper

Above £2 million the allowance reduces by £1 for every £2 of the excess, so an estate of £2.35 million or more loses the whole £175,000 with no transferred allowance to add.

The detail that costs money is how the £2 million is measured: everything in the estate after debts, but before exemptions and reliefs. You do not take off spouse exemption, agricultural relief or business relief. So a farm or family company can be fully relieved in its own right and still count, pound for pound, towards the £2 million, taking the allowance off the family home. HMRC's own example taxes a £2,150,000 estate holding £1 million of agricultural property at 100% relief, and tapers the allowance anyway (IHTM46023). See Business and Agricultural Relief.

Lifetime gifts are not counted in the £2 million, even gifts made within seven years of death (see Gifts and the Seven Year Rule). Pushing the other way, from 6 April 2027 most unused pension funds come into Inheritance Tax (see Pensions and Inheritance Tax).

Claiming a late spouse's unused band

If your husband, wife or civil partner died first and their allowance was not used, the unused percentage passes to you. HMRC calls it the brought-forward allowance.

• It is available even if the first death was before 6 April 2017, when the allowance did not exist: nothing can have been used, so 100% carries forward.
• It does not matter how small that estate was, or whether it included a home. Only the taper reduces it.
• You can bring forward from more than one late spouse, capped at 100%, giving a combined band of up to £350,000.
• It only helps if there is a qualifying home on the second death that is closely inherited, and it is never automatic. It has to be claimed.

The downsizing addition

People move. They sell the family house and buy a bungalow, or sell up to pay for care, or move in with a daughter. The downsizing addition stops the allowance vanishing because the home did. All three conditions apply:

1. They sold, gave away or moved to a less valuable home on or after 8 July 2015.
2. The former home would have qualified had they kept it.
3. Direct descendants inherit at least some of the estate. It need not be property; cash or investments will do.

The addition is usually the lower of the allowance lost and the value of the other assets the descendants inherit, and only one move or sale counts. It has to be claimed; it is never given automatically. Nobody tells HMRC at the time of the move either, so keep the completion statement where your executors will find it, and note it when writing your Will.

How executors claim it, and by when

• The allowance itself is not strictly a claim: where the conditions are met it is due automatically. In practice you give the details on the Inheritance Tax account, form IHT400, and on form IHT435.
• The transferred allowance (form IHT436) and the downsizing addition (form IHT435) must both be claimed within two years of the end of the month of death, or three months from when the executors started to act if later. HMRC can allow a late claim in some cases.

A worked example

Margaret is a widow with two adult children. Her husband died in 2014 leaving her everything, so his allowances went unused. She dies in 2026 with an estate of £900,000: a home worth £450,000 and £450,000 of savings. Her estate should pay nothing, because her two nil rate bands and two residence nil rate bands come to exactly £1 million.

But her Will leaves the house on a discretionary trust for her children and grandchildren, drafted to give the family flexibility. Nobody becomes entitled to the house on her death, so it is not closely inherited and both residence nil rate bands fall away. Her allowances drop to £650,000, £250,000 is taxable, and the bill is £100,000.

The Will could have left the house to the children outright, or on an immediate post-death interest, keeping the flexibility elsewhere. Or the trustees could have appointed it out within two years. Nobody spotted it in time. Hypothetical example, for illustration only.

Common mistakes

Putting the home into a discretionary trust and letting the two years run out. The trust may be doing something valuable. It just has to be looked at with this allowance in mind, before the deadline.

Attaching an age to the gift. "To my grandchildren at 25" feels prudent and costs the allowance.

Nobody claiming the transferred band, or the downsizing addition. Neither is automatic, both have a two year deadline, and they are among the most commonly missed claims in estate administration.

Forgetting the taper where there is a business or a farm. Relieved assets still count towards the £2 million.

Leaving a pre-2017 Will untouched. The allowance did not exist when it was drafted.

Questions? Book a free call

If this has you wondering about your own Will, or an estate you are dealing with, we will look at it and say plainly whether the allowance is safe. Pick a time that suits you and your local Squiggle consultant will call you. No charge, no obligation, no pressure, just a friendly chat. Book a call or call 01233 659 796.

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Squiggle Consult are estate planning consultants, not financial advisers, and are not regulated by the Financial Conduct Authority. Pension and investment decisions need an FCA-authorised adviser.

This factsheet is general information for England and Wales, not legal, tax or financial advice, and the rules can change. Worked examples are hypothetical and for illustration only. Last reviewed: August 2026.