What is the residence nil rate band?

The residence nil-rate band is an extra inheritance tax allowance of up to £175,000 when a home is left to children or grandchildren. Added to the standard £325,000 nil-rate band, it lets a person pass on up to £500,000 tax free. A married couple or civil partners can pass on £1 million.

The residence nil-rate band was introduced in April 2017 and reached £175,000 in 2020. It only applies when a residence that the person lived in passes to direct descendants. These include children, stepchildren, adopted children, foster children and grandchildren. Leaving the home to a nephew, niece or friend does not qualify. Downsizing rules can protect the allowance if someone sells or moves to a smaller home.

Any unused allowance can pass to a surviving spouse or civil partner. It tapers away for large estates. For every £2 an estate is worth over £2 million, £1 of the allowance is lost. Both nil-rate bands are frozen until April 2031. The standard £325,000 band has not changed since 2009. Married couples and civil partners can effectively combine both bands for up to £1 million.

Inheritance tax is charged at 40% on estates above the available allowances. Only about one in twenty estates pays it, though that share is rising because thresholds are frozen while house prices grow. From April 2027 unused pension pots will also count towards estates, pulling more families into inheritance tax. Gifts made more than seven years before death usually fall outside the estate.

Who it affects: Estates passing a home to children