Inheritance Tax on the Family Home

What the residence nil-rate band does

The residence nil-rate band is an additional allowance available on top of the standard nil-rate band. It applies where a residence you have lived in at some point passes on death to direct descendants: children, stepchildren, adopted and foster children, grandchildren and their spouses.

It is not available on buy-to-let property you have never occupied, and it cannot exceed the value of the qualifying property itself. Like the standard allowance, any unused portion can generally be transferred to a surviving spouse or civil partner, which is why couples often have considerably more available than they assume.

The £2 million taper

Once the net value of an estate exceeds £2 million, the residence nil-rate band is withdrawn at a rate of £1 for every £2 above the threshold. For estates a little over the line, this creates an effective marginal tax rate far higher than 40% on that slice of value.

The practical consequence is that reducing estate value below £2 million can be worth far more than the amount gifted. Lifetime gifting, charitable legacies and pension planning all become disproportionately valuable in this band. It is one of the few places in the tax system where a modest change produces an outsized result.

Why will drafting matters so much

The relief depends on how the property passes, not just to whom. Leaving a home into certain types of discretionary trust can break the qualifying conditions, even where the eventual beneficiaries are your children. Wills written before the relief existed frequently contain exactly that kind of provision.

Ownership structure matters too. Property held as joint tenants passes automatically to the survivor, which may be fine for a married couple but can be unhelpful in blended families or where trust planning is intended. Severing a joint tenancy so each share can be dealt with separately is a simple step with significant consequences.

Downsizing and selling the home

You do not lose the relief by moving to a smaller property or into care. Downsizing addition rules preserve the allowance you would have had, provided the replacement assets pass to direct descendants and the necessary records exist. This is another area where paperwork decides the outcome.

Executors must be able to show what the former property was worth and when it was sold or transferred. If you downsize or sell, keep the completion statement and valuation with your will documents. Without them, a legitimate claim can be difficult to substantiate years later.

Practical options for the family home

Where the home represents most of the estate, the challenge is liquidity: the tax is due but the asset cannot easily be sold quickly. Common approaches include:

• Life cover written in trust to provide immediate cash for the tax bill
• Reviewing wills so the property qualifies for the residence allowance
• Severing joint tenancy where trust planning is appropriate
• Gifting other assets to bring the estate below the £2 million taper
• Considering equity release only where the wider plan supports it
• Keeping full records of any downsizing or disposal

Reviewing your position

Property values move, allowances are frozen, and rules change. An estate that sat comfortably within the allowances five years ago may now be well above them. The only way to know is to run the calculation with current values, including pensions, investments, life policies and gifts made in recent years.

If you would like to understand exactly what your family would face and what can be done about it, our advisers will produce the figures and set out the realistic options for protecting the home.

Frequently Asked Questions