Residence Nil-Rate Band: How the £175,000 Home Allowance Works

The residence nil-rate band (RNRB) is an extra inheritance tax allowance for people who pass their main home to direct descendants. For 2025/26, it is worth up to £175,000 per person. Combined with the standard nil-rate band of £325,000, a single person can shield up to £500,000 from inheritance tax if the conditions are met. A married couple can potentially pass on up to £1 million tax-free when both nil-rate bands and both residence bands transfer correctly.

This allowance sounds straightforward but comes with detailed rules about who qualifies as a direct descendant, what happens if you downsize, and how the allowance tapers on larger estates. Use our inheritance tax calculator to see how the residence band affects tax on your estate.

Who qualifies for the residence nil-rate band

The deceased must have owned a residential property that was their home at some point. The property, or a share of it, must pass to direct descendants on death. Direct descendants include children, grandchildren, stepchildren, adopted children, and the spouses of children who died before the deceased. It does not include siblings, nieces, nephews, or unmarried partners who are not step-parents to the children.

The property does not have to be the home at death. If you moved into care and the house was sold, downsizing provisions may preserve part of the allowance. If you never owned a home, the residence nil-rate band does not apply. If you owned a home but left it to a nephew, the allowance is lost even if the rest of the estate goes to children.

How the allowance is applied

The residence nil-rate band is applied to the estate after the standard nil-rate band. It reduces the taxable value before the 40% rate is charged. If your estate is worth £600,000 and you pass your home to your children, you might use £325,000 standard band plus £175,000 residence band, leaving £100,000 taxable. Tax at 40% would be £40,000.

The residence band cannot exceed the value of the home inherited by direct descendants. If your home is worth £120,000, the residence band used is £120,000, not the full £175,000. The unused portion cannot be set against other assets like cash or shares. It applies to the home only.

Model this with the inheritance tax calculator by entering your total estate value and selecting the option for main residence passed to children.

The £2 million taper

Estates worth more than £2 million lose residence nil-rate band at a rate of £1 for every £2 over the threshold. An estate of £2,350,000 loses the entire £175,000 residence band. The standard nil-rate band is not tapered. This means very large estates gain nothing from the residence allowance even if the family home passes to children.

The taper threshold has not risen with inflation, so more estates lose the residence band each year. If your estate is near £2 million, small reductions through lifetime gifting or pension planning may preserve the residence band worth £70,000 in tax at 40%.

Downsizing and the RNRB

Many older people sell the family home to move into a smaller property or care. The downsizing rules allow the residence nil-rate band to be preserved if you sold your main home on or after 8 July 2015 and passed the proceeds (or other assets of equivalent value) to direct descendants on death.

The downsizing addition is complex. The executor must claim it and demonstrate that the deceased downsized and that assets of equivalent value passed to qualifying beneficiaries. Keeping records of the property sale, the purchase of any replacement home, and the will or estate distribution is essential. Without documentation, HMRC may deny the downsizing addition and tax the estate as if the residence band never existed.

Transferring unused residence band to a spouse

Like the standard nil-rate band, unused residence nil-rate band can transfer to a surviving spouse or civil partner. If the first death leaves everything to the survivor, the residence band may be unused because spouse transfers are exempt from tax. The survivor's estate can then claim both their own £175,000 and the transferred £175,000, giving £350,000 of residence band on second death, plus up to £650,000 of standard nil-rate band.

The maximum total on second death is £1 million before taper. This figure assumes full transfer of both bands from the first death and full availability on the second. Partial use on first death reduces the transferable percentage.

Wills and the residence band

How your will is written affects whether the residence band can be used. If you leave your estate to a discretionary trust for children, the residence band may be lost because the children do not inherit the home directly. If you leave the home to your spouse and other assets to children, the residence band is unused on first death but may transfer to the spouse for use later.

Nil-rate band discretionary trusts were common in older wills before the residence band existed. They can now waste the residence allowance. A will review with a solicitor who understands current inheritance tax rules is worthwhile, especially for couples whose wills were drafted before 2017 when the residence band was introduced.

Property wealth and other taxes

The family home is often the centrepiece of both the residence nil-rate band and the overall estate value. If you sell property during your lifetime, capital gains tax principal private residence relief usually shields your main home from CGT. Buy-to-let properties do not qualify for the residence band unless they were your main home at some point, and CGT applies on disposal. Use our capital gains tax calculator for lifetime property sales.

Property also affects your overall wealth planning. A couple with a £400,000 home and £350,000 in savings has an estate above the single-person allowance but below the combined £1 million target for couples. Structuring ownership and wills to use both partners' bands on second death is the difference between a £40,000 tax bill and zero.

RNRB and pensions

Pension pots left to beneficiaries are usually outside the estate for inheritance tax if the pension scheme has discretion over death benefits. That means pensions do not consume nil-rate band in the same way as property. Some families deliberately draw down other assets during retirement and preserve pensions for inheritance, though income tax applies when beneficiaries inherit drawdown pots.

Balancing pension nominations, property ownership, and cash gifts requires looking at the estate as a whole. The residence band rewards passing the home to children. Pensions reward keeping funds in wrapper with valid nominations. Together they can move a taxable estate below the threshold without aggressive planning.

Common mistakes

Leaving the house to a trust instead of children directly. Selling the home without recording downsizing details. Assuming the residence band applies when the estate exceeds £2 million without calculating the taper. Failing to claim transferred residence band on second death. Leaving the home to children but giving away other assets within seven years that push the estate over the combined bands.

• Review wills written before 2017 for nil-rate band trust clauses
• Keep records of property sales if downsizing applies
• Calculate taper if estate nears £2 million
• Confirm direct descendant beneficiaries in the will
• File for transferred bands on first death to support second death claim

Putting the numbers together

The residence nil-rate band was introduced because the standard nil-rate band alone left many family homes subject to tax when passed to children. The £175,000 addition recognises that housing wealth is concentrated in the main residence. Used correctly with spouse transfers, it protects up to £1 million for couples.

Run your estate through the inheritance tax calculator with the residence option enabled. If tax is due, consider whether will changes, downsizing documentation, or lifetime gifts can preserve the allowance. The residence band is one of the few inheritance tax reliefs aimed directly at ordinary families passing a home to the next generation.

Couples who own their home as joint tenants pass the property automatically to the survivor. On second death, the residence band applies to the full value left to children. Tenants in common ownership gives more flexibility to use the first death's bands but requires explicit will planning. How the property is held on the Land Registry affects the inheritance tax outcome as much as the value of the house itself.

If you have moved into rented accommodation and no longer own a home, the residence nil-rate band may not be available at all unless downsizing provisions apply. Do not assume the extra £175,000 is automatic on every estate. It depends on the property, the beneficiaries, and the total estate value after taper.

Adult children who inherit a home worth more than £175,000 still benefit from the full residence band up to the allowance cap. The unused portion of the band cannot be offset against cash legacies. If the home passes to children and the rest of the estate goes to charity, the residence band still applies to the property portion while the charitable gift may qualify for its own exemption.