Inheritance tax is generally charged at 40%, but the part of an estate falling within the residence nil rate band taper can carry an effective marginal rate of 60%. This is because the residence nil rate band is withdrawn by £1 for every £2 by which the adjusted value of the estate exceeds £2 million. Where the full residence nil rate band would otherwise be available, an extra £100,000 in an estate at this level can produce an extra £60,000 of inheritance tax.
Key facts
The residence nil rate band is £175,000 per person, available where a qualifying residential interest passes to direct descendants.
The taper under section 8D(5) of the Inheritance Tax Act 1984 withdraws it by £1 for every £2 by which the estate’s adjusted value exceeds £2 million.
It is exhausted at £2.35 million for an individual, and £2.7 million for a surviving spouse or civil partner with a full transferred allowance.
The £2 million threshold is measured after allowable liabilities but before business property relief, agricultural property relief and exemptions.
Where the first spouse or civil partner died before 6 April 2017, a 100% unused allowance can generally be transferred, subject to the statutory conditions and a claim being made.
How does the residence nil rate band taper work?
The residence nil rate band gives an additional £175,000 of allowance per person where a qualifying residential interest passes to direct descendants. Combined with two standard nil rate bands of £325,000 each, that produces the £1 million figure commonly quoted for married couples and civil partners — where all four allowances are available and transferable in full.
What receives far less attention is that the residence nil rate band is tapered away for larger estates. For every £2 by which the adjusted value of the estate exceeds £2 million, £1 of the allowance is withdrawn.
Worked example: the 60% band
Take the estate of a surviving spouse with both nil rate bands and both residence nil rate bands available.
Estate of £2,000,000. Allowances total £1,000,000. Taxable estate £1,000,000. Inheritance tax at 40%: £400,000.
Estate of £2,100,000. The £100,000 excess withdraws £50,000 of residence nil rate band. Allowances fall to £950,000. Taxable estate £1,150,000. Inheritance tax at 40%: £460,000.
An additional £100,000 in the estate has generated an additional £60,000 of tax. The effective marginal rate on that slice is 60%.
This continues until the residence nil rate band is exhausted at £2.7 million for a couple, or £2.35 million for an individual. For a couple that is a £700,000 band in which every additional pound carries an effective 60% rate.
It is worth being precise about the mechanism: there is no 60% statutory rate. The figure is the combination of 40% tax and the withdrawal of an allowance. Nothing on any form flags its existence, which is exactly why it gets missed.
Why the taper is worse for farming and business families
The £2 million threshold is measured against the estate’s adjusted value before business property relief and agricultural property relief are applied.
A farming family whose land qualifies for relief may therefore pay reduced or, depending on the applicable relief and the post-April 2026 rules, in some cases no inheritance tax on that land — and still lose the entire residence nil rate band on the family home, because the land counts at its unreduced value when determining whether the estate has crossed £2 million.
Relief on one asset does nothing to protect the allowance on another. For landowning and business-owning families this is frequently a substantial and potentially avoidable element of the calculation.
Three other ways the allowance is lost
The wrong kind of will trust
The home must be “closely inherited” within the meaning of section 8J of the Inheritance Tax Act 1984. It has to pass to children, grandchildren, stepchildren, adopted children, foster children or certain other lineal descendants — either outright or on one of the qualifying trust interests the legislation recognises.
Leave the home to a discretionary trust, or to children contingently on reaching 30, and the allowance may be lost. Many wills drafted before 2017 contain exactly this structure, included for entirely sensible reasons at the time, which can now cost a family up to £350,000 of allowance.
This one is sometimes retrievable. A deed of variation, or an appointment out of the trust within two years of death under section 144 of the Inheritance Tax Act 1984, may alter the inheritance tax treatment — but only if the problem is spotted within the applicable period. After that the opportunity has gone.
An unclaimed downsizing addition
Where the deceased sold the family home and moved somewhere less valuable, or into residential care, a downsizing addition under sections 8FA to 8FE of the Inheritance Tax Act 1984 can preserve some or all of the relief, provided an equivalent value is closely inherited and the statutory conditions are met.
It is not applied automatically. It has to be identified and claimed, and it is readily missed where the deceased’s historic property ownership is never investigated.
A first spouse who died before April 2017
The residence nil rate band did not exist before 6 April 2017. Where the first spouse or civil partner died before that date, none of the allowance could have been used, so a 100% unused percentage can generally transfer to the survivor under section 8G, subject to the statutory claim requirements.
Executors sometimes assume that because the allowance did not exist at the first death, there is nothing to transfer. The opposite is generally true — and the claim is worth up to £175,000 of allowance, or £70,000 of tax.
Why this is a calculation, not a form-filling exercise
None of the above can safely be resolved by working through the boxes on an IHT400.
It comes from valuing the estate properly, reading the will as it was actually drafted rather than as it was intended, tracing what happened to a property sold eight years ago, and locating paperwork from a death that may have occurred in the 1990s.
Done correctly, a family may retain up to £350,000 of allowance, worth £140,000 in tax. Done poorly, nobody may ever find out, because HMRC is under no obligation to point out a relief that was not claimed.
For estates approaching £2 million the question is also worth asking during lifetime. Reducing the estate below the threshold, or leaving at least 10% of the relevant baseline amount to charity so the rate on the relevant component falls to 36% under Schedule 1A of the Inheritance Tax Act 1984, can change the arithmetic materially. Both need careful calculation and sufficient time to act.
Common questions
At what estate value is the residence nil rate band lost completely? £2.35 million for an individual with one full residence nil rate band, and £2.7 million for a surviving spouse or civil partner with two full allowances, including a 100% transferred allowance.
Does the standard nil rate band taper as well? No. The £325,000 standard nil rate band does not taper at any estate value. Only the residence nil rate band is withdrawn.
Is the £2 million threshold measured before or after debts? After allowable liabilities are deducted. The taper applies to the estate’s statutory “adjusted value” — broadly the net estate after allowable liabilities, but before reliefs such as business property relief and agricultural property relief, and before exemptions including spouse or civil partner exemption and charity exemption.
Does the residence nil rate band apply if the home is sold by the executors? It can. A sale during the administration does not by itself prevent the allowance from applying. The statutory analysis concerns the qualifying residential interest comprised in the estate and whether it is inherited by direct descendants, so executors need to be satisfied the will, the administration and the destination of the proceeds all meet the conditions.
Can the residence nil rate band be claimed if there are no children? Not unless there are other qualifying lineal descendants. The allowance requires a qualifying residential interest passing to lineal descendants. Nieces, nephews, siblings and unrelated beneficiaries do not qualify, however close the relationship.
Does the taper affect a transferred allowance from a first spouse? Yes. Both the survivor’s own residence nil rate band and any transferred allowance are subject to the taper, based on the adjusted value of the survivor’s estate.
Speak to a probate and inheritance tax solicitor
Sarah Rushworth is a Solicitor & Director at Laker Legal Solicitors, specialising in complex estates and inheritance tax calculations — including business and agricultural property, downsizing additions, transferable allowances from historic deaths, and the interaction between will trusts and the residence nil rate band.
If you are an executor dealing with an estate at or near £2 million, or an accountant or financial adviser with a client in that position, contact Sarah on 01524 753040 or at sarah.rushworth@lakerlegal.co.uk.
This article is general information about the law of England and Wales, not advice on any particular estate. Inheritance tax thresholds, reliefs and freeze dates change; confirm the current position before relying on any figure set out here.
