Inheritance Tax (IHT) is payable on death at the rate of 40% of the value of a person’s net estate (after payments of debts, expenses and so on) above the current Nil Rate Band of £325,000. On the death of a surviving spouse or civil partner, where the Nil Rate Band of the fi rst to die was not used and is transferrable to the survivor’s estate, this fi gure doubles to £650,000.

In 2007 the Conservative party pledged to increase the Nil Rate Band to £1m. In July 2015 the introduction of a Residence Nil Rate Band was announced. Superfi cially, this new measure appeared to honour that pledge. However, in reality this will only be the case where spouses or civil partners meet the particular conditions required to claim both the Nil Rate Band and the new Residence Nil Rate Band (RNRB). There will be many cases where the RNRB cannot be claimed.

The RNRB will apply to deaths from 6 April 2017 onwards. From that date an additional £100,000 RNRB will be available. This sum is set to increase incrementally by £25,000 per year so that by 2020/21 an additional £175,000 will be available. The Nil Rate Band will be frozen at £325,000 throughout this period. For spouses and civil partners who meet the various conditions and can transfer both types of unused bands between them, they will have combined total Nil Rate Bands and RNRBs of £1m (being £325,000 and £175,000 (£500,000) each).


The fi rst condition is that the deceased must have had a residence at death or, at least, have had a residence at some point after the new rules were announced on 8 July 2015. The detail of the rules relating to “downsizing” where a person moves to a less valuable residence or ceases to own a residence at all have not been published yet and a consultation is underway. Subject to those downsizing provisions, to make full use of the RNRB the value of the residence must not be lower than the level of the RNRB at death. Otherwise the RNRB above the value of the residence will be wasted (unless it can be transferred to a surviving spouse or civil partner).

The defi nition of “residence” for the purpose of the new rules is not yet fully clear but it is a requirement that the deceased lived in the property at some point. An investment property will therefore not qualify although if it was lived in and later rented out, or vice versa, the property would qualify. Where a person has more than one residence the personal representatives of their estate can elect which residence the RNRB should apply to. However, the RNRB cannot be divided between different residences.

Direct descendants

The second condition is that the residence must be inherited by “direct descendants” who are defi ned as children, grandchildren and further lineal descendants, including step-children and adopted children. The defi nition also extends to the respective spouses and civil partners of lineal descendants, and also widows, widowers and surviving civil partners who have not remarried. 

Whether the RNRB will apply where a direct descendant inherits an interest in a trust, rather than inherits outright, depends on the nature of the trust. Trusts for minors when they reach 18 or for young people when they reach 25 will qualify, as do trusts where an individual of any age is entitled to the income or benefi t of the trust property but not the underlying capital. In contrast, a discretionary trust, where no benefi ciary is entitled as of right to either income or capital, will not qualify. This does not mean that discretionary trusts should be removed from existing wills. Aside from the many advantages offered by the use of discretionary trusts which are not related to IHT, it is understood that writing-back provisions within the IHT legislation will continue to be available within two years of death. These provisions will allow trustees to alter the terms of the trust as is most benefi cial at the time so that the estate qualifi es for the RNRB, if the other conditions are met as well.

Estates over £2m

The third and fi nal condition is that the value of the estate does not exceed the taper threshold of £2m. For every £2 that the value of the net estate (before taking into account exemptions and relief from IHT) exceeds the threshold the RNRB available will taper by £1. For deaths after 6 April 2017, when the RNRB will be £100,000, where an estate is valued at over £2.2m (or £2.4m where the unused RNRB has been transferred to a surviving spouse or civil partner) it will taper to nothing. For deaths after 2020/21, when the RNRB will be £175,000, these taper limits will have increased to estates over £2.35m in value (or £2.7m where the unused RNRB can be transferred).

For estates valued above the threshold there may be circumstances where it is tax effi cient to make lifetime gifts outright or to trust (and regardless of the 7 year rule which applies to the normal Nil Rate Band) in order to reduce the value of the estate below the taper threshold.


The new rules are potentially complicated and it is important to take advice on your particular circumstances before they come into effect from 6 April 2017 onwards. Some of the details are not clear yet but what is certain is that the Nil Rate Band has not been simply raised to £1m.