Rising property values and frozen tax thresholds have pushed more families into the scope of inheritance tax in recent years. For many, the estate left behind now exceeds the tax-free limits, triggering a 40% charge on anything above the threshold. With the government under pressure to raise revenue, inheritance tax remains a significant—and often underestimated—financial consideration.
At the centre of this issue are two key allowances: the nil rate band and the residence nil rate band. These exemptions determine how much of an estate can pass tax-free to beneficiaries. While the nil rate band has been fixed at £325,000 since 2009, the residence nil rate band adds an additional allowance when a home is passed to direct descendants, subject to certain conditions.
Both allowances form the backbone of inheritance tax planning in the UK. But despite their importance, many people either misunderstand how they apply or fail to use them effectively.
With more estates edging past the exemption limits each year, the question becomes: How do these thresholds actually work—and how much tax exposure could you be facing?
The nil rate band is the threshold below which an estate is not subject to inheritance tax. Set at £325,000 since 2009, it remains the cornerstone of inheritance tax calculations in the UK. Despite inflation and rising asset values—particularly in property—this threshold has not increased in over a decade, pulling more estates into the taxable bracket.
Every individual has a nil rate band. If the total value of your estate falls below this figure, no inheritance tax is due. Above that, any amount is taxed at 40%, unless other reliefs apply.
In the case of married couples or civil partners, the unused portion of one partner’s nil rate band can be transferred to the surviving partner’s estate. This means a combined allowance of up to £650,000 may be available before inheritance tax is triggered.
The nil rate band is not limited to cash or investments. It applies to the total value of the estate, including:
While gifts made more than seven years before death generally fall outside the taxable estate, those made within the seven-year window are subject to different treatment. If the total value of these gifts exceeds the nil rate band, inheritance tax may still be payable, even if little remains in the estate at death.
Because the nil rate band has not kept pace with asset inflation, estates that would once have fallen below the tax threshold are now exposed to significant liability. Many individuals now breach the limit through property ownership alone, particularly in London and the South East.
To avoid unnecessary tax exposure, it’s important to treat the nil rate band not as a fixed buffer but as a planning variable—something that should influence how assets are structured, how gifts are timed, and how estates are prepared. The allowance may be static, but your ability to plan around it is not.
Introduced in 2017, the residence nil rate band (RNRB) was designed to address a growing problem: the standard nil rate band had failed to keep pace with rising house prices, particularly in the South East.
Without adjustment, this meant that even modest family homes were pushing estates above the inheritance tax threshold.
The RNRB provides an additional allowance—currently up to £175,000—when a main residence is passed to direct descendants. When combined with the standard nil rate band, this raises the total tax-free threshold to £500,000 per individual, or up to £1 million for married couples or civil partners, assuming both allowances are fully available.
The RNRB is not automatic and comes with specific conditions:
These rules make the RNRB far more nuanced than the standard nil rate band. It’s not simply about the value of the estate—it’s about who receives the home, how it's structured, and whether the right conditions are met.
The RNRB begins to taper once an estate exceeds £2 million in value. For every £2 above this threshold, £1 of the RNRB is lost.
This means that:
In other words, high-value estates are often excluded from this allowance—even if a main residence is being left to direct descendants.
Like the standard nil rate band, the RNRB has been frozen in recent years. But property values haven’t stood still.
Many estates now exceed the RNRB’s limits without holding particularly high-end assets. In practical terms, that means a growing number of families are missing out on the allowance—not because of extravagant wealth, but because of asset inflation and a failure to meet the fine print.
Properly accounting for the RNRB requires more than recognising its existence. It demands forward-looking planning—particularly for families with complex structures, lifetime gifts, or blended households.
When used together, the nil rate band and residence nil rate band can shield a significant portion of an estate from inheritance tax. In the right circumstances, they can create a combined allowance of up to £1 million for married couples or civil partners — enough to cover most estates in the UK. But the details matter.
Each person has access to:
When one partner dies and leaves their estate to the surviving partner, no inheritance tax is charged — and any unused portion of both allowances can be transferred to the surviving partner’s estate. This means the second estate could benefit from:
This is not automatic — it must be claimed, and eligibility for the residence nil rate band still depends on the final estate passing a qualifying residence to a direct descendant.
It’s common for estates to qualify for one allowance but not the other. For example:
For unmarried individuals or those without children, only the standard nil rate band may apply — and even that can be eroded by lifetime gifts made within the seven years before death.
These allowances are not simply thresholds to keep in mind — they are tools that require planning. The order in which assets are passed, the timing of gifts, and the contents of a will can all affect whether the allowances are used in full, in part, or not at all.
In estates with high-value property or complex family arrangements, failing to coordinate the use of both nil rate bands can result in avoidable tax liability, even when the intention was to keep everything “within the family.”
The nil rate band and residence nil rate band are core tools in inheritance tax planning, but their effectiveness depends entirely on how an estate is structured. Relying on the thresholds alone—without adjusting for timing, beneficiaries, or estate composition—can leave large portions of wealth exposed to tax.
Gifts made during your lifetime can reduce the size of your taxable estate, but the rules are strict. The nil rate band is still relevant here:
This means poorly timed gifts can unintentionally erode your tax-free allowance. Conversely, gifts made early enough—and structured correctly—can help ensure the nil rate band is used effectively.
Many estates fail to use the residence nil rate band simply because the will doesn’t pass the property to a qualifying beneficiary.
Regularly reviewing your will, particularly in the context of property ownership and family structure, is one of the most practical ways to preserve access to both allowances.
Estates valued above £2 million face a tapering reduction of the residence nil rate band. It’s a sharp and sometimes unexpected loss of relief:
Business owners, landlords, and those with large property portfolios may cross this threshold without realising it—especially when lifetime gifts are factored back in. Early planning, including the use of trusts or lifetime transfers, may help restructure the estate to remain within the taper threshold.
The nil rate band and residence nil rate band have the power to reduce or eliminate inheritance tax for many families — but only when applied with care.
Small decisions, like who inherits your home or when a gift is made, can have outsized tax consequences. That’s not a matter of ticking boxes — it’s a question of whether your planning reflects how these rules actually work.
Inheritance tax is often seen as unavoidable. But in reality, what’s taxed — and what isn’t — often comes down to planning.
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Note: This page is for information purposes only and should not be considered as financial advice. Always consult an Independent Financial Adviser for personalised financial advice tailored to your individual circumstances.