How Does the Main Residence Nil Rate Band Work

The Main Residence Nil Rate Band is one of the most valuable tax reliefs available to families. It can increase the amount a person can pass on free of Inheritance Tax by up to £175,000, or £350,000 for a couple. However the rules are more complicated than most people expect. The relief depends on who you leave the property to, the value of your estate, whether you have downsized and how the property is owned.

This article explains exactly how the allowance works and how you can make sure your family does not miss out on a significant tax saving.

1. What the Main Residence Nil Rate Band Is

Everyone in the UK already has a standard nil rate band of £325,000 for Inheritance Tax. The Main Residence Nil Rate Band is an additional allowance of up to £175,000 that applies only if you leave your main home to your direct descendants.

Direct descendants include:

• children

• stepchildren

• adopted children

• foster children

• grandchildren

• great grandchildren

It does not apply if you leave the home to siblings, nieces, nephews or friends.

In my opinion

This is the single most misunderstood point. People assume leaving the house to any family member qualifies, but it must be a direct descendant.

2. How Much the Residence Nil Rate Band Is Worth

The allowance is currently:

• £175,000 per person

• £350,000 per couple when transferable

This means that a married couple can combine:

• £325,000 each standard nil rate band

• £175,000 each residence nil rate band

Giving a possible total tax free threshold of:

£1,000,000 for a married couple with a qualifying home.

In my opinion this is one of the most generous Inheritance Tax allowances available today.

3. How the Allowance Works in Practice

The relief applies to the value of the home being passed down, not the whole estate. It works like this:

1. You die owning a qualifying home

2. You leave that home to direct descendants

3. Your estate receives up to £175,000 extra tax free allowance

4. Your spouse or civil partner can inherit any unused allowance

Example

A widow leaves her home worth £300,000 to her son.
Her estate gets the standard £325,000 plus £175,000 residence allowance.
Total exemption = £500,000.
If the rest of her estate is below £500,000 there is no Inheritance Tax.

4. The Home Must Be a “Qualifying Residence”

Not every property you own qualifies. The home must be:

• a property you lived in

• part of your estate at death

• passed to direct descendants

It does not have to be your home at the time of death, but it must have been your home at some point.

You can only nominate one property as your qualifying residence.

If you own multiple properties, only one can be used for the relief.

5. What Happens If You Downsize

This is where the rules are surprisingly fair. If you downsize or sell your home and move into rented accommodation or care, you can still claim the RNRB.

This is called the downsizing addition.

You must meet the following:

• you owned a more valuable home after 8 July 2015

• you sold or downsized it

• you leave part of your estate to direct descendants

The allowance is calculated so that you are not penalised for downsizing later in life.

In my opinion

This rule is incredibly helpful for older people moving into smaller homes or care settings. Many assume they give up the allowance, but that is not true.

6. The Tapering Rule for Large Estates

The RNRB begins to reduce once your estate exceeds £2 million.
This is known as tapering.

For every £2 your estate exceeds £2 million, £1 of the residence allowance is removed.

This means that estates worth around £2.35 million lose the allowance entirely.

Example

Estate value: £2,200,000
Excess above £2,000,000 = £200,000
Taper reduction = £200,000 ÷ 2 = £100,000
Remaining allowance = £175,000 minus £100,000 = £75,000

In my opinion

Families with estates close to the £2 million mark should seek planning advice early because simple restructuring can preserve the allowance.

7. How Couples Benefit From Transferable Allowances

When one spouse dies, any unused allowance transfers to the surviving spouse.

This includes:

• unused standard nil rate band

• unused residence nil rate band

A married couple passing a home to their children could therefore obtain:

• £650,000 total standard nil rate band

• £350,000 total residence nil rate band

Total possible exemption = £1,000,000

This applies even if:

• the first spouse died many years ago

• the home was owned in one name

• the surviving spouse remarries

In my opinion this is one of the biggest tax saving opportunities available to parents and grandparents.

8. What Happens If You Leave Your Home to a Trust

The RNRB applies only if the home passes to direct descendants. However the treatment is different when a trust is involved.

You usually qualify if the trust gives descendants an immediate right to the home

For example:

• bare trusts

• interest in possession trusts

• disabled person’s trusts

You usually do not qualify if trustees have full discretion

For example:

• discretionary trusts

• trusts where no one has an automatic right to live in the property

If the trust structure is wrong, the family can lose the entire RNRB.

In my opinion

Anyone planning to leave property into a trust should seek advice because this is one of the easiest ways to accidentally lose the allowance.

9. Can You Claim RNRB if the Property Is Rented Out

Yes, as long as:

• the property was your home at some point

• you leave it to direct descendants

It does not matter if it was rented at the time you died.

10. Can You Claim RNRB if You Owned the Home Jointly

Yes. The allowance applies to your share of the property.

Example:

A property is worth £400,000 owned jointly.
Your share is £200,000.
Your RNRB covers up to £175,000 of that share.

If the home is worth less than the allowance, you can still pass on the unused portion to your spouse.

11. When You Cannot Use the RNRB

You cannot use the allowance if:

• you do not leave your home to direct descendants

• your estate is above the £2 million taper and reduced to zero

• your home is left entirely to someone else before passing to children later

• the property is left in a discretionary trust with no immediate right to inherit

• the deceased never lived in the property

• you do not own a qualifying residence when you die and are not downsizing

In my opinion these rules highlight how important it is to review your will regularly.

12. How To Make Sure You Do Not Lose the Allowance

Based on what I see, here are practical steps to protect your family:

Check your will

Make sure your home passes directly to children or grandchildren.

Avoid discretionary trusts for the main home

Unless there is a clear reason.

Plan around the £2 million taper

Gifting or restructuring can preserve the allowance.

Keep records if you downsize

HMRC needs evidence of your previous home.

Consider transferring unused allowances

Surviving spouses should record unused allowances properly.

Review home ownership

If the property is owned in one name, consider whether joint ownership helps.

13. Real World Examples

Example 1: Couple with a £600,000 home

John and Maria own a home worth £600,000.
They leave it to their two children.
Combined RNRB = £350,000
Combined standard allowance = £650,000
No Inheritance Tax is due on a £1,000,000 estate.

Example 2: Person with a £2.3 million estate

Sarah dies with an estate of £2.3 million.
Excess above taper = £300,000
Reduction = £150,000
Remaining RNRB = £25,000
She loses most of the allowance.

Example 3: Downsizing

Peter sold his £450,000 home and moved into a £150,000 flat.
He leaves the flat to his grandson.
Because he previously owned a more valuable home, he still qualifies for the full £175,000 RNRB.

Example 4: Discretionary trust

An elderly couple leave their home into a discretionary trust for their grandchildren.
There is no direct inheritance.
The RNRB is lost completely.

In My Opinion: Why You Should Take Advice Early

In my opinion the RNRB is one of the hardest reliefs for families to navigate because it interacts with your will, your home ownership, your estate size and family circumstances. A small change in structure can save or lose up to £175,000 per person of tax free allowance.

The families who plan early usually save the most. The families who rely on old wills, complex trust structures or assumptions are often the ones who overpay Inheritance Tax.

Conclusion

The Main Residence Nil Rate Band is a valuable Inheritance Tax allowance that lets you pass more of your home to your children or grandchildren tax free. It gives up to £175,000 per person on top of the standard £325,000 allowance, but only if the property passes to direct descendants and your estate is structured correctly. Downsizing does not remove the relief, but large estates and some trust structures can.

In my opinion anyone with a valuable home should understand the RNRB clearly and review their will regularly to ensure their family does not miss out.