Residence Nil-Rate Band: The £175,000 Allowance and the £2m Taper
The residence nil-rate band is an extra Inheritance Tax allowance of up to £175,000, available only where a home passes to direct descendants. Combined with the standard £325,000 nil-rate band, it gives an individual £500,000 of allowance, and a couple £1,000,000.
It is also the most conditional allowance in the system, and the easiest to lose by accident. This page covers the conditions, the taper that removes it from larger estates, and the drafting mistakes that waste it.
What it is
Introduced in April 2017 and fully phased in by 2020/21, the residence nil-rate band is worth up to £175,000 of allowance — up to £70,000 of tax at 40%.
Three conditions have to be met:
- The estate includes a residential property interest — a dwelling the deceased lived in at some point as their home. A buy-to-let they never occupied doesn't qualify; a former home they lived in years ago does.
- That property passes on death to one or more direct descendants.
- The estate is not so large that the taper removes the allowance.
The allowance is the lower of the value of the home passing to descendants and the available allowance. A £90,000 flat left to a son gives £90,000 of allowance, not £175,000. A £900,000 house gives the full £175,000 — the surplus is not wasted as such, it is simply capped.
Only one property can be nominated. Where someone owned several homes they lived in at different times, the executors choose which to claim against — normally the most valuable one passing to descendants.
Who counts as a direct descendant
Generously defined, but exactly defined. It includes:
- Children, grandchildren and great-grandchildren
- Step-children, adopted children and foster children
- A child the deceased was appointed guardian or special guardian for while that child was under 18
- The spouse or civil partner of any of the above
- The widow, widower or surviving civil partner of a descendant who died before the deceased, provided they have not remarried
It does not include:
- Brothers, sisters, nieces, nephews, cousins
- Parents
- Unmarried partners of the deceased
- Friends, carers, or anyone else
This is where the allowance is most often lost. Someone with no children who leaves their house to a much-loved niece gets no residence nil-rate band at all. There is no workaround: the relationship test is statutory.
The £2m taper and the 60% marginal rate
Above a £2,000,000 estate, the allowance is withdrawn at £1 for every £2 over the threshold.
| Net estate | Allowance remaining (individual) | Allowance remaining (full transfer) |
|---|---|---|
| £2,000,000 | £175,000 | £350,000 |
| £2,100,000 | £125,000 | £300,000 |
| £2,200,000 | £75,000 | £250,000 |
| £2,350,000 | £0 | £175,000 |
| £2,500,000 | £0 | £100,000 |
| £2,700,000 | £0 | £0 |
Two details matter enormously here.
The taper is measured on the estate before reliefs and exemptions. It uses the net estate — assets less liabilities — before Business Relief, Agricultural Relief, the spouse exemption or charitable exemption are applied. So a farmer with £2,000,000 of land qualifying for relief and a £500,000 home still has a £2,500,000 estate for taper purposes, and loses the residence allowance completely, even though the taxable estate after relief is far lower. This surprises people every time.
It creates a 60% marginal rate. Between £2,000,000 and £2,350,000, every extra £1 of estate is taxed at 40p and costs 50p of allowance, which is itself worth 20p of tax. Total marginal cost: 60p in the pound.
Here is the effect on a real estate — £600,000 home to the children plus £1,600,000 of other assets:
| Step | Amount |
|---|---|
| Net estate | £2,200,000 |
| Nil-rate band | −£325,000 |
| Residence allowance (£175,000 less £100,000 tapered) | −£75,000 |
| Taxable | £1,800,000 |
| Tax at 40% | £720,000 |
That £100,000 of lost allowance costs £40,000 in tax by itself. The calculator shows the taper explicitly whenever it bites, because it is the single most surprising result for anyone with a valuable home.
Transferring an unused residence band
Like the main nil-rate band, an unused residence allowance transfers to a surviving spouse or civil partner — giving a potential £350,000.
The rules are more forgiving than people expect:
- The first spouse did not need to own a home. The transferable amount exists even if they died before the allowance was introduced in April 2017, and even if they never owned property.
- It transfers as a percentage of the allowance at the time of the second death.
- A first death before 6 April 2017 leaves 100% available, since the allowance didn't exist to be used.
- It is claimed on form IHT436, within two years of the second death.
The taper is applied to the first spouse's estate too, however. Where the first spouse's estate exceeded £2,000,000, the transferable amount may be reduced even though no allowance was actually used.
The downsizing addition
If someone sells their home or moves to a less valuable one and then dies, they could lose an allowance they would otherwise have had. The downsizing addition fixes that.
It applies where:
- The home was sold, given away or downsized on or after 8 July 2015
- A less valuable home (or no home) is in the estate at death
- Other assets of at least equivalent value pass to direct descendants
The addition broadly restores the allowance that was lost. Someone who sold a £400,000 house, moved into a £150,000 flat and left both the flat and £250,000 of cash to their children can claim an addition for the shortfall.
It is claimed on forms IHT435 and IHT436, and the arithmetic is genuinely fiddly — it depends on the value at the date of disposal and the percentage of allowance available then. The calculator does not model the downsizing addition. If you have downsized since July 2015, treat the result as understating your allowance and take advice.
Trusts and the residence band
A frequent and expensive trap. Whether the allowance survives depends on the type of trust the home passes into:
| Trust type | Allowance available? |
|---|---|
| Immediate post-death interest (IPDI) for a descendant | Yes |
| Bereaved minor's trust / 18-to-25 trust | Yes |
| Disabled person's trust | Yes |
| Discretionary trust — even if the children are the only beneficiaries | No |
| Nil-rate band discretionary trust holding the home | No |
Many wills written before 2017 use a discretionary trust for the family home, often to protect against care fees or to ring-fence a share for children of a first marriage. Those wills now routinely waste up to £350,000 of allowance — £140,000 of tax. If a will of that era is still in place, it is worth reviewing on this point alone.
Where a discretionary trust has received the home, appointing the property out absolutely to descendants within two years of death can, under section 144 of the Inheritance Tax Act 1984, be read back as though the will made the gift directly — preserving the allowance. That window is short and the drafting has to be right.
How to avoid losing it
- Check who the home actually goes to. If the will leaves it to anyone other than direct descendants, the allowance goes unused.
- Review any pre-2017 will with a discretionary trust over the home.
- Claim the transferable band. Forms IHT435 and IHT436, within two years.
- Watch the £2,000,000 line. Lifetime giving, charitable legacies and pension arrangements all reduce the net estate — and below £2,000,000 the allowance comes back at 60p in the pound of estate reduced.
- Keep records if you downsize. Sale date, sale price and what you did with the proceeds. The downsizing addition is unprovable without them.
The calculator applies the taper and the descendant test to your own figures, and tells you in pounds how much allowance is at stake.
Common questions
What is the residence nil-rate band?
It is an additional Inheritance Tax allowance of up to £175,000, available where a residence that the deceased lived in at some point passes to direct descendants — children, grandchildren, step, adopted or foster children, and their spouses. It sits on top of the standard £325,000 nil-rate band.
Do grandchildren count for the residence nil-rate band?
Yes. Children, grandchildren, great-grandchildren, step-children, adopted children, foster children and children the deceased was a guardian for all count, as do the spouses and civil partners of any of them, including widowed spouses of a descendant who died first.
What happens to the residence nil-rate band above £2 million?
It is withdrawn at the rate of £1 for every £2 by which the net estate exceeds £2,000,000. An individual's £175,000 allowance is gone entirely once the estate reaches £2,350,000. Where a full band has been transferred from a late spouse, the £350,000 is gone by £2,700,000.
Can I claim the residence nil-rate band if I sold my house before I died?
Possibly, through the downsizing addition. If you sold or downsized on or after 8 July 2015 and left assets of equivalent value to direct descendants instead, you can claim an addition reflecting the allowance you would have had. It is claimed on forms IHT435 and IHT436.
Does the residence nil-rate band apply if the home goes into a trust?
It depends on the type of trust. An immediate post-death interest, a bereaved minor's trust, an 18-to-25 trust or a disabled person's trust for a descendant all qualify. A discretionary trust normally does not, even where the only beneficiaries are the children — which is a common and expensive drafting trap.