Detailed guide: Inheritance Tax: additional threshold (RNRB)

Updated: You can now use the additional threshold calculator to work out how much additional threshold an estate may be entitled to.

Introduction

This guide explains how to apply the additional threshold to an estate for most circumstances. But there are some basic rules to follow to see if an estate qualifies for the additional threshold, which is sometimes known as the residence nil rate band or RNRB.

HM Revenue and Customs (HMRC) can’t:

  • give tax planning advice
  • comment on what someone should do to take advantage of the additional threshold
  • explain what someone’s entitlement to the additional threshold or tax position will be in the future

In some less straightforward situations you may want to get professional advice about:

  • how to work out the additional threshold
  • the effect of the additional threshold on the Inheritance Tax (IHT) liability
  • what action you need to take to make sure that an estate qualifies for the additional threshold

You can also use the additional threshold calculator to work out how much additional threshold the estate may be entitled to.

When the additional threshold applies

An estate will be entitled to the additional threshold if:

  • the person dies on or after 6 April 2017
  • the person owns a home, or a share of one, so that it’s included in their estate
  • their direct descendants such as children or grandchildren inherit the home, or a share of it

For estates valued at more than £2 million, the additional threshold (and any transferred additional threshold) will be gradually withdrawn or tapered away.

An estate may also be entitled to the additional threshold when an individual has downsized to a less valuable home or sold, or given away their home after 7 July 2015.

Additional threshold amounts

The maximum available amount of the additional threshold will increase yearly.

For deaths in the following tax years it will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

For later years, the maximum additional threshold will increase in line with inflation (based on the Consumer Prices Index).

Unused additional threshold

Any unused additional threshold when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the additional threshold wasn’t available at that time.

Although you don’t need to make a formal claim for the additional threshold, you’ll need to give details of the amount due and supporting information on the IHT return following a death. You’ll need to make a claim to transfer any unused additional threshold from the estate of a late spouse or civil partner. You’ll also need to make a claim for any additional threshold as a result of downsizing or disposal of the home before death.

The additional threshold only applies to the estate of a person who’s died. It doesn’t apply to gifts or other transfers made during a person’s lifetime. This includes gifts that become taxable because they’ve been made within 7 years of a donor’s death.

Where someone gives away their home and continues to benefit from it, for example, by living in the property, HMRC treats that home as being included in the estate. So the additional threshold may be available for that home if it’s given away to a direct descendant.

How to calculate and apply the additional threshold

The additional threshold applies in addition to the basic Inheritance Tax threshold (sometimes known as nil rate band or NRB and currently it’s £325,000) if the individual and estate meet the qualifying conditions. The additional threshold doesn’t mean that the home is exempt for IHT purposes but that could be the result of the new rules in some cases.

The amount of the additional threshold due for an estate will be the lower of:

  • the value of the home, or share, that’s inherited by direct descendants
  • the maximum additional threshold available for the estate when the individual died

You should add any transferred additional threshold from a late spouse’s or civil partner’s estate to the amount of the additional threshold due for an estate. You set the combined additional threshold against the value of the estate first.

You then set the basic Inheritance Tax threshold (and any transferred basic threshold) against the remaining value of the estate. In many cases the order that you apply the additional threshold and basic Inheritance Tax threshold will make no difference. But in some cases it will affect the amount of any unused additional threshold or basic threshold available for transfer to a spouse or civil partner’s estate.

Case study 1 shows how the additional threshold and basic Inheritance Tax threshold applies to an estate.

The value of the home that direct descendants inherit doesn’t have to be more than the existing basic threshold or transferred basic threshold, for the additional threshold to apply. You apply the additional threshold to the whole taxable estate, not just to the value of the home, so the benefit of the additional threshold is shared across the whole estate.

If the value of the home is less than the maximum available additional threshold, the unused amount of additional threshold can’t be set against the other assets in the estate. But, the unused additional threshold would be available to transfer to the deceased’s spouse or civil partner’s estate when they die and leave a home to their direct descendants.

Case study 2 shows how the additional threshold applies in these situations.

Gifts and other transfers made during a person’s lifetime (lifetime transfers)

Unlike the existing basic Inheritance Tax threshold the additional threshold doesn’t apply to any lifetime transfers, such as:

  • transfers into trusts
  • the value of any gifts made within 7 years of a donor’s death which then become taxable

Case Study 3 shows how the basic Inheritance Tax threshold applies to lifetime transfers, and how that affects how you apply the additional threshold.
The basic Inheritance Tax threshold applies to any lifetime transfers and any gifts made within 7 years of the donor’s death, but the additional threshold doesn’t. So the basic Inheritance Tax threshold could be completely used up by those transfers and gifts, but any additional threshold would still be available to reduce the IHT charge on the estate at death.

Case Study 4 shows how the basic Inheritance Tax threshold is used separately from the additional threshold.

For married couples and civil partners, you look at the position for each person’s estate separately on each death. This would include each person’s share of the home if it’s owned jointly.

Transfer of any unused additional threshold

For married couples and civil partners any unused additional threshold can be transferred when the surviving spouse or civil partner dies after 5 April 2017. It doesn’t matter when the first of the couple died, even if the death occurred before the additional threshold was available. The additional threshold can’t be transferred to a ‘partner’ who’s not the spouse or civil partner of the deceased. This is still true even if they lived together and jointly owned the home.

If the additional threshold wasn’t fully used when the first of the couple died, the unused percentage can be transferred to the surviving spouse or civil partner’s estate. This is transferred in a similar way to the existing basic Inheritance Tax threshold.

Where the first of the couple died before 6 April 2017 their estate wouldn’t have used any of the additional threshold as it wasn’t available. So 100% of the additional threshold will be available for transfer unless the value of their estate exceeded £2 million and the additional threshold is tapered away. It’s the unused percentage of the additional threshold that’s transferred, not the unused amount. This makes sure that if the maximum amount of additional threshold increases over time, the survivor’s estate will benefit from that increase.

You calculate the actual amount that’s transferred to the surviving spouse or civil partner’s estate in 2 steps:

Step 1. Work out the percentage of additional threshold that wasn’t used on the first death. You do this by dividing the unused amount of additional threshold by the total additional threshold that was available on the first death and multiplying the result by 100. If the first death occurred before 6 April 2017 the unused additional threshold and total available additional threshold are both deemed to be £100,000 so the unused percentage is 100%.

Step 2. Multiply the percentage of additional threshold that was unused on the first death by the maximum additional threshold available at the time of the survivor’s death. This gives the sum available to transfer.

Case study 5 shows an example of how the additional threshold is transferred.

The personal representatives of the surviving spouse or civil partner must make a claim to transfer the unused additional threshold within 2 years of the end of the month in which the person dies. This can be extended in some circumstances.

The additional threshold and basic Inheritance Tax threshold aren’t linked so the percentages transferred can be different. For example, if the estate of the first of the couple to die used up all of the basic Inheritance Tax threshold leaving none to transfer, but there’s unused additional threshold, you can still transfer the unused additional threshold.

The percentage of transferred additional threshold will be limited to 100%. This means that if an individual has had more than one spouse or civil partner and they make a claim to transfer the unused additional threshold from each one, the total transferred additional threshold can’t be more than 100% of the maximum available amount.

The home that the surviving spouse or civil partner leaves to their direct descendants doesn’t have to be the same home that they lived in with their late spouse or civil partner to either qualify for the additional threshold or transfer it.

The surviving spouse or civil partner doesn’t have to have previously owned the home with their late spouse or civil partner, or inherited it from them. It can be any home as long as the surviving spouse or civil partner lived in it at some stage before they died and the home is included in their estate when they die.

The additional threshold and any transferred additional threshold is only available if:

  • the surviving spouse or civil partner leaves a home to their direct descendants
  • the home of the surviving spouse or civil partner is included in their estate

But, if the surviving spouse or civil partner disposed of their home after 7 July 2015 and leaves other assets to their direct descendants when they die, the additional threshold may still be available under the downsizing rules.

Couples who aren’t married or in a civil partnership, or who’ve divorced, will still be able to benefit from the additional threshold individually if they leave a home to their direct descendants. But they won’t be able to transfer any unused additional threshold to each other.

Direct descendants

For additional threshold purposes, a direct descendant of a person is:

  • a child, grandchild or other lineal descendant of that person
  • a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

In addition, a person’s direct descendant is:

  • a child who is, or was at any time, that person’s step-child
  • an adopted child of that person
  • a child who was fostered at any time by that person
  • a child where that person is appointed as a guardian or special guardian for that child when they’re under 18

In this context, the child who inherits the home doesn’t have to be under 18. A person’s step-child is limited to someone whose parent is, or was, the spouse or civil partner of that person.

Direct descendants don’t include nephews, nieces, siblings and other relatives who aren’t included in the list above.

One or more direct descendants of the deceased can inherit a home, or a share of it.

To be eligible for the additional threshold, the home, or the share of it, must be left to a person’s direct descendants so that it becomes part of the beneficiaries’ estate as a result of the person’s death.

If a home is left to beneficiaries who are a mixture of direct descendants and other relatives or individuals, the value of the home must be apportioned according to the share of the property the direct descendants inherit.

Case study 6 explains this.

The home

The additional threshold only applies to one home where it’s both:

  • included in the deceased’s estate
  • lived in at some stage by the deceased before their death

If the deceased downsized or disposed of their home before they died, the additional threshold only applies if the former home would have been included in their estate before the downsizing or disposal.

If the deceased owned more than one home, the personal representatives can nominate which one should qualify for the additional threshold.

The home doesn’t have to be a person’s main home or have been lived in, or owned, for a minimum period. It can be any property that the deceased lived in as long as it’s included in their estate on death. A property that the deceased owned, but never lived in, such as a buy-to-let property, won’t be eligible for the additional threshold.

The value of the home for additional threshold purposes will be the open market value of the property less any liabilities secured on it such as a mortgage. The home doesn’t have to be worth more than a certain minimum value (for example, more than £325,000 or above the maximum available additional threshold). If the value of the home, or share of it, being inherited by direct descendants is below the maximum available additional threshold, the amount of the additional threshold is limited accordingly.

The whole of the home doesn’t have to be left to direct descendants. If only a share of the home is inherited by the deceased’s direct descendants, the value of the home must be apportioned. The additional threshold is calculated on the basis of that apportioned value.

Case Study 6 shows how the additional threshold is calculated when a share of the home is left to direct descendants.

The home doesn’t have to be in the UK but it does have to be within the scope of IHT and it must be included in a person’s estate. This may depend on the deceased’s domicile and the location of the home.

UK domiciled individuals are subject to IHT on their worldwide assets so it doesn’t matter where the home is located. Non-UK domiciled individuals are only subject to IHT on their assets in the UK, so the home must be located in the UK to be within the scope of IHT and within their estate. In these cases, the home will only qualify for the additional threshold if it’s in the UK.

Inheriting the home

For additional threshold purposes, a person’s direct descendants inherit a home if it’s left to them:

  • on death in the deceased’s will
  • under the rules of intestacy
  • by some other legal means as a result of the person’s death

The home doesn’t have to be specifically mentioned in the deceased’s will. It can be inherited as part of the residue of the estate. Where the home is included in the residue and that residue passes to a number of different people, HMRC treat each as inheriting a proportion of the home.

The direct descendants will only inherit the property for additional threshold purposes if they become entitled to it on the death of the deceased. If the will has a condition that the deceased’s grandchildren have to reach a certain age before they can inherit the home which means the property is held in a trust subject to a contingency, the additional threshold wouldn’t apply. This is because the grandchildren don’t inherit the home on the death of their grandparent.

If the home is held in trust before death and it stays in trust, the home will only qualify for the additional threshold if it becomes part of the direct descendant’s estate for IHT purposes following the death.

The actual home doesn’t have to end up in the hands of the deceased’s direct descendants. An estate could still be eligible for the additional threshold if the deceased’s personal representatives sell the home as part of the administration of the estate and pass the sale proceeds to the direct descendants.

In the same way, once the direct descendants have inherited the home, there are no restrictions on what they have to do with it. An estate will still qualify for the additional threshold even if the direct descendants decide to sell the home after they’ve inherited it.

Case study 7 shows how the additional threshold applies when the home is sold after a death.

The direct descendants can also inherit the home if it’s left to them as a result of amending the deceased’s will by a deed of variation. The terms of a will would effectively be superseded by the deed of variation so the outcome of the deed has to be considered, rather than the wording of the will.

Trusts

A home, or a share of one, can be held in a trust before an individual’s death. Or it can be transferred to a trust on their death.

The availability of the additional threshold will depend on the type of trust. This is because the type of trust will affect whether HMRC treat the home as part of a person’s estate for IHT purposes. It will also affect whether HMRC treat that person’s direct descendants as inheriting the home.

Because this is complicated, the information given below is only a general guide. Where a home, or a share of one, is held in a trust or transferred to a trust, you should discuss how the additional threshold applies with a solicitor or other professional adviser who knows about trust law.

The additional threshold won’t apply to transfers of the home or any other assets into a trust during a person’s lifetime. This applies even if the beneficiary is a direct descendant of the transferor, or if they’re entitled to the assets in the trust.

Trusts included in a person’s estate

If a home is held in a trust for a person’s benefit before their death, it’ll usually be included in that person’s estate for IHT purposes if the trust gives the person (the beneficiary) the right to use or occupy the property. This right is often called an interest in possession.

This can happen when a person is given a right to live in the family home following the death of their spouse or civil partner. The home is held in a trust for the lifetime of the survivor (or life tenant) and is included in their estate for IHT purposes. When the survivor dies, their estate will be eligible for the additional threshold if their direct descendants then inherit their home.

If a home is put into a trust on an individual’s death, the additional threshold will available if both the:

  • person who benefits from the trust (the beneficiary) is a direct descendant of the deceased
  • type of trust, is one that means the home is included in the beneficiary’s estate for IHT purposes

If the beneficiary isn’t a direct descendant of the deceased, the estate won’t qualify for the additional threshold. In that case the unused additional threshold would be available to transfer to a surviving spouse or civil partner’s estate.

Case study 8 shows how the additional threshold is transferred when a home is put into a trust for a surviving spouse.

The home will no longer be in the beneficiary’s estate if the trust comes to an end during the beneficiary’s lifetime. This could happen, for example, when the surviving spouse remarries and the home then passes to their direct descendants. In this situation the surviving spouse’s estate wouldn’t qualify for the additional threshold when they die because the home isn’t inherited by their direct descendants on death. But the transfer of the home may still qualify as a disposal for downsizing purposes.

Trusts not included in a person’s estate

If a home is held in a discretionary trust, the home wouldn’t normally form part of a person’s estate. In these circumstances, their estate wouldn’t be eligible for the additional threshold even if the home goes to the beneficiary’s direct descendants when the beneficiary dies.

If a home is put into a discretionary trust on death, the deceased’s estate won’t qualify for the additional threshold even if the beneficiaries are direct descendants of the deceased. Whether the beneficiaries are entitled to use the home is at the discretion of the trustees, so the home won’t form part of any beneficiary’s estate and they’ll not be treated as inheriting the home.

The estate may still qualify for the additional threshold if the trust meets certain conditions. For example, if the trust has been set up for:

  • a disabled beneficiary
  • orphaned children under 18
  • any children under 25

You should discuss how the additional threshold applies in these situations with a solicitor or other professional adviser.

Tapering away the additional threshold

The additional threshold will be gradually withdrawn, or tapered away, for an estate valued at more than £2 million even if a home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the value of the estate is more than the £2 million taper threshold.

This threshold may increase in line with inflation after the tax year 2020 to 2021.

Case study 9 shows how the additional threshold is tapered away for an estate worth more than £2 million.

To work out whether the taper applies, the value of the estate is the total of all the assets in the estate less any debts or liabilities. When you work out the value of the estate for taper purposes you don’t take off any:

  • exemptions such as spouse exemption
  • reliefs such as agricultural or business property relief

You ignore assets that are specifically excluded from IHT (excluded property).

Tapering can also reduce the amount of additional threshold available to transfer to a surviving spouse or civil partner, even if no additional threshold is used when the first of the couple dies. You calculate the amount of transferred additional threshold that the survivor’s estate can claim using the percentage of additional threshold that was unused on the earlier death. If the estate of the first of the couple to die is worth more than £2 million, tapering will reduce the amount of the unused additional threshold in that estate. This also in turn reduces the amount of additional threshold that can be transferred to the surviving spouse or civil partner’s estate.

Case study 10 shows how the additional threshold available for transfer is reduced by tapering.

Downsizing

If an estate doesn’t qualify for the full amount of additional threshold, the estate may be entitled to an additional amount of additional threshold, known as a downsizing addition if all these conditions apply:

  • the deceased disposed of a former home and either downsized to a less valuable home, or ceased to own a home, on or after 8 July 2015
  • the former home would have qualified for the additional threshold if it had been kept until death
  • at least some of the estate is inherited by the deceased’s direct descendants

The amount of the downsizing addition will generally be equal to the additional threshold that’s been lost because the former home is no longer in the estate. It will also depend on the value of the other assets in the estate that are left to direct descendants. But the downsizing addition can’t exceed the maximum amount of additional threshold that would have been available if the disposal or downsizing hadn’t happened.

The deceased’s personal representatives must make a claim for the downsizing addition within 2 years of the end of the month in which the person dies. The time limit can be extended in some circumstances.

HMRC doesn’t have to be told when the downsizing move or disposal of the former home takes place. The deceased’s personal representatives can make the claim for the additional threshold and any downsizing addition as part of completing the IHT returns. But, it may be helpful to make a note of the details of the move or disposal so that personal representatives are aware of it and have the information available to make the claim accordingly.

Only one disposal of a former home can be taken into account for the downsizing addition. If the deceased disposed of more than one home between 8 July 2015 and their date of death, the personal representatives can choose which disposal is taken into account to calculate the downsizing addition.

Calculating the lost additional threshold

There are 5 steps to work out the amount of additional threshold that’s been lost:

Step 1. Work out the additional threshold that would have been available when the disposal of the former home took place. This figure is made up of the maximum additional threshold due at the date of disposal (or £100,000 if the disposal occurred before 6 April 2017) on any transferred additional threshold which is available at the date of death.

Step 2. Divide the value of the former home at the date of disposal by the figure in step 1 and multiply the result by 100 to get a percentage. If the value of the former home is greater than the figure in step 1 the percentage will be limited to 100%. If the value of the home disposed of is less than the figure in step 1, the percentage will be between 0% and 100%.

Step 3. If there is a home in the estate on death, divide the value of the home on death by the additional threshold that would be available at the date of death (including any transferred additional threshold). Multiply the result by 100 to get a percentage (again this percentage can’t exceed 100%). If there’s no home in the estate at death this percentage will be 0%.

Step 4. Deduct the percentage in step 3 from the percentage in step 2.

Step 5. Multiply the additional threshold that would be available at the date of death by the figure from step 4. This gives the amount of the lost additional threshold.

Case study 11 shows how the lost additional threshold is calculated.

The effect of step 3 is that there’ll be a different amount of lost additional threshold depending on whether the deceased has either:

  • downsized to a less valuable home
  • disposed of a home
    If the percentage in step 3 is the same as, or greater than, the percentage in step 2 there’s no loss of additional threshold and there’ll be no downsizing addition.

Downsizing to a less valuable home

There may be some lost additional threshold where the deceased downsized to a less valuable home but still has a home in their estate on death. This will only happen when the value of the home at death is below the maximum additional threshold available to the estate.

The downsizing rules won’t apply if either:

  • there’s no loss of the additional threshold because the value of any home at death is equal to, or more than the maximum available additional threshold
  • the additional threshold isn’t available because although there is a home in the estate on death, the home isn’t left to a direct descendant

To see if the downsizing addition applies, you don’t just look at whether the estate qualifies for the maximum additional threshold. Instead you have to work out whether the value of any home still in the estate at death is too low to qualify for the maximum additional threshold if it was left to direct descendants.

Case study 12 gives an example of when a downsizing addition wouldn’t be due.

Where the deceased downsized and still had a home when they died, the additional threshold for the estate will be made up of both:

  • the additional threshold on the home included in the estate
  • any downsizing addition due for the former home

The downsizing addition will generally be the lower of:

  • the amount of additional threshold that’s been lost as a result of the downsizing move
  • the value of the other assets in the estate left to direct descendants

Case study 13 shows how the downsizing addition and additional threshold are worked out.

If only part of the home in the estate is left to direct descendants, that part is used to work out the additional threshold. This may also affect the total additional threshold for the estate in downsizing situations.

Case study 14 shows how the downsizing addition and additional threshold are worked out where only a part of the home is left to direct descendants.

Where the downsizing occurs before 6 April 2017, HMRC treat the maximum available additional threshold at that time as £100,000.

Case study 15 shows how the downsizing addition is worked out in these situations.

If the deceased had downsized but had never lived in the less valuable property, that property is not a home and isn’t included in the estate for additional threshold purpose. This means that the position is the same as if the former home had been disposed of.

Disposing of a home

Where the deceased sold or disposed of a former home so there’s no longer any home in their estate, the additional threshold for the estate will be equal to the downsizing addition in respect of the former home.

You calculate the downsizing allowance in these situations differently because there’s no home in the estate that could qualify for any additional threshold on death. When you work out the lost additional threshold, the percentage at step 3 will always be 0% and the result at step 4 will always be the same as the figure at step 2. So, steps 3 and 4 can be missed out.

The amount of additional threshold that’s been lost will depend only on the value of the former property and the maximum additional threshold available at that time. Again, if the disposal took place on or after 8 July 2015 but before 6 April 2017, HMRC will treat the maximum additional threshold available as £100,000.

If the value of the former home is equal to or more than the maximum available additional threshold at the time of the disposal, HMRC will treat the lost additional threshold as 100% of the maximum additional threshold available at the date of death.

Where there’s no home in the estate at death, the downsizing addition will generally be the lower of:

  • the amount of additional threshold that’s been lost as a result of the disposal
  • the value of the other assets in the estate that the direct descendants inherit

Case study 16 shows how the downsizing addition is worked out if there is no home in the estate at death.

If the value of the home in the person’s estate is less than the maximum additional threshold at the time of the disposal, the lost additional threshold is worked out as a percentage of that maximum additional threshold. You then apply that percentage to the maximum additional threshold at the date of death.

Case study 17 shows how the downsizing addition is worked out if the home is worth less than the maximum available additional threshold.

Downsizing where there is transferred additional threshold

Where additional threshold is transferred following the death of a spouse or civil partner, you calculate the downsizing allowance in largely the same way. The difference is that the maximum additional threshold available at both the date of death and the date of disposal is increased to include the amount of transferred additional threshold.

Case study 18 shows how the downsizing addition is worked out when additional threshold has been transferred from a spouse or civil partner’s estate.

Downsizing and trusts

The downsizing rules apply where a person disposes of a home that’s included in their estate. Property held in certain trusts is included within a person’s estate for IHT purposes and so the downsizing rules apply in these circumstances too.

Where a home is held in such a trust, the trustees might be able to dispose of it or they may change it to a less valuable one. This is treated the same as if the deceased had downsized or disposed of the home themselves. Where a person’s right to occupy a home held in a trust ceases, for example on re-marriage, this is also treated as a disposal for the purposes of the downsizing rules.

A person can have more than one interest in a home. For example, they may own half of a house outright while the other half is held in a trust for their benefit. These would be two separate interests in the same home.

If a person disposes of more than one interest in a single home at the same time, for example, because they sell the whole house, all those interests can be taken into account for downsizing purposes. But, if a person disposes of different interests at different times, the deceased’s personal representatives can only nominate one of those disposals to be taken into account to work out any downsizing addition.

The downsizing rules can be complicated where the additional threshold is transferred or trusts are involved. Whilst this guide explains the basic rules, it can’t cover more complex situations. You should get professional advice about how to work out the additional threshold in these situations.

Source: HMRC