Inheritance Tax on Property: How the Main Residence Nil Rate Band Works

How Inheritance Tax works

Inheritance Tax (IHT) is a tax on the estate of someone who has died. It is charged at 40% on the value of the estate above a tax-free threshold called the nil rate band. For most people, the largest single asset in their estate is their home, so IHT planning and property are closely linked.

The standard nil rate band is £325,000 per person. Married couples and civil partners can transfer any unused nil rate band to the surviving spouse, giving a couple a combined nil rate band of up to £650,000. The full transfer is automatic if the first spouse died after 2007.

The main residence nil rate band

In addition to the standard nil rate band, there is a separate Residence Nil Rate Band (RNRB) for estates where the main home is being passed to direct descendants. The RNRB is currently £175,000 per person. Combined with the standard £325,000 per person, a married couple passing their home to children or grandchildren can shield up to £1,000,000 from Inheritance Tax.

The RNRB has these conditions:

1. The deceased owned a residential property at the time of death

2. The property was at some point their main residence

3. The property is being inherited by direct descendants (children, grandchildren, stepchildren, adopted children, foster children)

4. The total estate is below £2 million (the RNRB is tapered above £2 million and is fully withdrawn by £2.35 million)

The RNRB applies to one property per person. If the deceased owned multiple properties, the personal representatives nominate which one qualifies.

Worked example: standard couple

A married couple worth £950,000 in total. Their home is worth £600,000, jointly owned. Their savings, ISAs, and other assets are £350,000.

When the first spouse dies:

• All assets transfer to the surviving spouse under the spouse exemption
• No IHT is due
• Both nil rate bands and both RNRBs transfer to the survivor

When the second spouse dies (passing everything to their children):

• Total estate: £950,000
• Combined nil rate band: £325,000 × 2 = £650,000
• Combined RNRB: £175,000 × 2 = £350,000
• Total tax-free: £1,000,000
• Taxable: £950,000 - £1,000,000 = £0
• IHT due: £0

This is why the headline £1 million figure is often quoted for couples with property.

Worked example: estate above £1 million

A widow whose husband died in 2018 (and unused nil rate band transferred). Her estate at death is £1.4 million, including her home worth £700,000 which she is leaving to her children.

• Combined nil rate band: £650,000
• Combined RNRB: £350,000
• Total tax-free: £1,000,000
• Taxable: £1.4 million - £1.0 million = £400,000
• IHT at 40%: £160,000

The IHT bill is paid by the executors from the estate before the children inherit.

Strategies to reduce IHT on property

Lifetime gifts (the 7-year rule)

Gifts made more than 7 years before death are completely outside the estate for IHT purposes. Gifts made within 7 years are added back to the estate but at a tapered rate. This is the most well-known IHT planning strategy.

There are catches:

• Gifts must be outright. Conditional or partial gifts may not qualify.
• "Gift with reservation of benefit" rules: if you give your home to your children but continue to live in it rent-free, the gift is treated as not having happened. You must either move out or pay full market rent.
• Gifts can have CGT consequences if the property has appreciated.

Discounted gift trusts

A formal trust structure that allows you to gift assets while retaining a defined right (such as an income stream). The IHT advantages are real but the structure is complex and the trust itself can have tax obligations. Specialist advice is essential.

Equity release before death

Releasing equity from your home and spending the cash (or gifting it more than 7 years before death) reduces the value of the estate. The interest on the equity release loan also reduces the estate value over time.

Life insurance written into trust

A life insurance policy written into a trust pays out outside the estate. The payout can be used to cover the IHT bill so the children do not need to sell the property to pay it. The premiums must be paid from the deceased's surplus income to avoid being treated as gifts.

Spouse exemption

Anything left to a UK domiciled spouse passes free of IHT. This does not save tax on the second death but it preserves the nil rate band and RNRB for the surviving spouse to use.

Relevant property trusts

Discretionary trusts holding property are taxed every 10 years on a charge of up to 6%. This is much lower than the 40% IHT rate but the trust structure is complex and is rarely the right answer for a single home.

Common pitfalls

1. Failing to use the spouse exemption: leaving everything to a spouse on first death and only doing IHT planning on the second death wastes the nil rate band.

2. Gifting property and continuing to live in it: triggers gift with reservation of benefit and the gift is ignored for IHT.

3. Joint tenancies: a property held as joint tenants passes automatically to the survivor on first death and cannot be left to children. Severing the joint tenancy and converting to tenants in common allows half the property to be left to children, using the first nil rate band.

4. Forgetting overseas property: UK domiciled individuals are taxed on worldwide assets. Holiday homes abroad are in the IHT net.

5. Underestimating property value: if HMRC challenges the value at death, additional IHT plus penalties may be due.

Property valuation for IHT

The estate must declare the property at its open market value on the date of death. This usually requires a formal valuation from a chartered surveyor (RICS qualified). The valuation must be defensible against HMRC challenge.

For the property facts you need, search the address on Property Passport UK at [/search](/search). The platform shows verified tenure (freehold or leasehold), the EPC rating, the full sold price history from HM Land Registry, flood risk, listed status, and other facts that affect valuation. This is the easiest way to assemble the property data your surveyor needs for an accurate estate valuation.

Look up the property data behind your tax decisions

Property Passport UK shows verified data for every one of the 19.35 million properties in England and Wales: tenure, EPC, sold prices, flood risk, listed status. Use it to research before you buy a second home, plan a sale, or work out a tax position. Search any address at [/search](/search). Every fact comes from an official UK government source.

Related guides

• Stamp duty second home explained
• CGT on second home UK
• Private residence relief explained
• Inheritance tax on property