How does the residence nil-rate band taper work for large estates?

Full answer

The residence nil-rate band (RNRB) gives an extra GBP 175,000 of Inheritance Tax (IHT) allowance, on top of the standard GBP 325,000 nil-rate band (NRB), when a residence (or its value) is left to direct descendants -- children, grandchildren and their lines, including step, adopted and foster children. Used in full, an individual can pass on GBP 500,000 before 40% IHT applies. The taper restricts the RNRB for larger estates. Once the net estate exceeds GBP 2,000,000, the RNRB is reduced by GBP 1 for every GBP 2 above that threshold. Because the band is GBP 175,000, it is fully withdrawn once the estate reaches GBP 2,350,000 (GBP 350,000 over the threshold x 1/2 = GBP 175,000 lost). Crucially, the test is the total estate value before reliefs and exemptions, so business or agricultural property can push you over the GBP 2,000,000 line even if those assets themselves are relieved. Worked example: an estate of GBP 2,100,000 is GBP 100,000 over the threshold, so the RNRB is cut by GBP 50,000 (GBP 100,000 / 2), leaving GBP 125,000 of residence band rather than GBP 175,000. The taper applies to each person, so a married couple or civil partners can have up to GBP 350,000 of combined RNRB, and any unused RNRB and NRB transfers to the survivor. That means a couple can potentially pass on GBP 1,000,000 tax-free -- but the same GBP 2,000,000 taper test bites on the second death's estate. Leaving 10% or more of the net estate to charity cuts the IHT rate on the rest from 40% to 36%. Estate planning around the GBP 2,000,000 cliff-edge, including lifetime gifting, can preserve the band. Use the inheritance tax calculator to model the taper against your estate value.

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