Guidance

Inheritance Tax: how to apply the additional threshold

See if an estate qualifies for the additional threshold (or residence nil rate band (RNRB)) for Inheritance Tax in various circumstances.

Overview

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. This guide explains this higher threshold in more detail.

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 liability
  • what action you need to take to make sure that an estate qualifies for the additional threshold

The additional threshold rates

If someone dies on or after 6 April 2017 and their estate is above the basic Inheritance Tax threshold, the estate may be entitled to an additional threshold before any inheritance tax becomes due. The extra amount for 2017 to 2018 is up to £100,000.

The maximum available amount will go up yearly.

For deaths in the following tax years it will be:

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

For later years, the threshold will go up in line with inflation based on the Consumer Prices Index.

How to calculate and apply the additional threshold

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

The additional threshold can be added to the basic Inheritance Tax threshold of £325,000 if the person and their estate meet the qualifying conditions.

The higher threshold doesn’t mean that the home is exempt from Inheritance Tax but that can be the result 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 direct descendants inherit
  • the maximum additional threshold available for the estate when the person died

Add any transferred additional threshold from a late husband, wife or civil partner’s estate to the amount of the additional threshold due for an estate.This gives you a combined additional threshold.

Take off the combined additional threshold from the value of the estate first.

Next, take off the basic Inheritance Tax threshold (and any transferred basic threshold) from the the rest of the value of the estate.

Usually, the order 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 or basic threshold available to transfer to a spouse or civil partner’s estate.

Example

John dies in the tax year 2020 to 2021 and leaves a home worth £300,000, and other assets worth £190,000 to his children.

The maximum available additional threshold in tax year 2020 to 2021 is £175,000.

additional threshold for the estate £175,000 (the lower of £300,000 and £175,000)
basic threshold £325,000
   
estate value £490,000
less additional threshold - £175,000
remaining value £315,000
less basic threshold - £315,000
amount that Inheritance Tax is due on £0

In this case the full additional threshold has been used up, but £10,000 out of the basic threshold of £325,000 is unused and can be transferred to John’s wife.

If the value of the home is less than the additional threshold

The home inherited by direct descendants doesn’t have to be worth more than the basic or transferred basic threshold, to get the additional threshold.

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

Example

Jane dies in the tax year 2020 to 2021 leaving a flat worth £100,000, and other assets of £400,000 to her son. She leaves the rest of her assets of £500,000 to her husband; these are exempt from Inheritance Tax.

The maximum available additional threshold in the tax year 2020 to 2021 is £175,000.

additional threshold for the estate £100,000 (the lower of £100,000 and £175,000)
basic threshold £325,000
   
estate value £500,000 (the £500,000 left to the husband is exempt)
less additional threshold - £100,000
remaining value £400,000
less basic threshold - £325,000
amount that Inheritance Tax is due on £75,000

The maximum possible additional threshold for this estate was £175,000, but the flat left to the son is only worth £100,000. So only £100,000 of basic threshold has been used.

The additional threshold that hasn’t been used (£75,000) is available to transfer to the husband’s estate. There’s no unused basic threshold to transfer as this was used up.

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

Unlike the 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 in the 7 years before the person that died gave them away (which are then taxable)

Example

Judy dies in tax year 2020 to 2021. She leaves a house worth £200,000 and other assets worth £250,000 to her daughter.

Within the 7 years before she died, she gave assets worth £100,000 to her nephew.

The maximum available additional threshold in tax year 2020 to 2021 is £175,000.

additional threshold for the estate £175,000 (the lower of £200,000 and £175,000)
basic threshold £325,000

Firstly, set the basic threshold of £325,000 against the value of the lifetime gifts of £100,000:

taxable lifetime gifts add up to £100,000
less basic threshold - £100,000
amount that Inheritance Tax is due on £0

This leaves £225,000 of the basic threshold to use against the estate.

estate value £450,000
less additional threshold - £175,000
remaining value £275,000
less remaining basic threshold - £225,000
amount that Inheritance Tax is due on £50,000

The basic Inheritance Tax threshold applies to any lifetime transfers and any gifts made in the 7 years before someone dies. But the additional threshold doesn’t. So the basic Inheritance Tax threshold could be completely used up by those transfers and gifts, any additional threshold is still available to reduce the tax on the estate.

Example

James dies in tax year 2020 to 2021 leaving a house worth £500,000, and other assets worth £250,000, to his granddaughter.

He’d made gifts of £700,000 to his other grandchildren and nephew within the 7 years before he died.

The maximum available additional threshold in 2020 to 2021 is £175,000.

additional threshold for the estate £175,000 (the lower of £500,000 and £175,000)
basic threshold £325,000

Firstly, take away the basic threshold of £325,000 from the lifetime gifts of £700,000:

lifetime gifts £700,000
less basic threshold - £325,000
value of gifts that Inheritance Tax is due on £375,000

The lifetime gifts use up all of the basic threshold. So Inheritance Tax will be paid on £375,000 worth of the gifts.

But the additional threshold is still available to take off from the estate value:

estate value £750,000
less additional threshold - £175,000
estate value that Inheritance Tax is due on £575,000

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

Direct descendants

For the purpose of the additional threshold, the direct descendant of someone is:

  • a child, grandchild or other lineal descendant
  • a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

This also includes:

  • a child who is, or was at any time, their step-child
  • their adopted child
  • a child who was fostered at any time by them
  • a child where they’re appointed as a guardian or special guardian when the child is under 18

The person 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 husband, wife 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 person that’s died can inherit a home, or a share of it.

If a home is left to people who are a mixture of direct descendants, other relatives or other people, the value of the home must be shared in proportion to the share of the property each direct descendant inherits.

Example

Jackie dies in tax year 2020 to 2021. Her estate includes a home worth £500,000.

In her will she leaves half of the property to her step-son and half to her nephew.

You work out the additional threshold based on the value of the property left to the step-son (£250,000). But, the actual additional threshold for the estate is restricted to £175,000. This is the lower of the maximum available threshold for tax year 2020 to 2021 (£175,000) and value of the half share of the home (£250,000).

Inheriting the home

Once you’ve decided that the home qualifies for the additional threshold, there are rules about how the direct descendants inherit a home. It must be left to them:

  • in the will of the person that’s died
  • under the rules of intestacy
  • by some other legal means

The home doesn’t have to be specifically mentioned in the person’s will. It can be inherited as part of what’s left of the estate (the residue) after specific legacies have been taken into account. The residue of the estate is what’s left after payment of:

  • debts such as mortgages and loans
  • funeral expenses
  • executor’s fees
  • taxes
  • other expenses from administering the estate
  • any specific gifts or legacies in the will

Where the home is included in what’s left of the estate and that’s passed on to a number of different people, HMRC treat each of them as inheriting a proportion of the home.

For the additional threshold, inheriting the home only counts if the direct descendants become entitled to the home when the person dies.

For example, if the will has a condition that the grandchildren have to reach a certain age before they can inherit the home, this means the property is held in a trust, so the additional threshold won’t apply. This is because the grandchildren don’t inherit the home at the time that their grandparent dies.

If the home is held in a trust before a person dies and it stays in trust when they die, the home will only qualify for the additional threshold if it becomes part of the direct descendant’s estate after the person dies.

The actual home doesn’t have to end up in the hands of the direct descendants. An estate could still be eligible for the additional threshold if the estate’s personal representative sells the home as part of the administration of the estate and passes 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 can 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.

Example

Jocelyn died in tax year 2019 to 2020 leaving her house, worth £500,000, to her 3 grandchildren as part of the residue of her estate. The maximum available additional threshold in tax year 2019 to 2020 is £150,000.

The 3 grandchildren don’t want to keep the property jointly. The estate’s personal representative sells the property and distributes the sale proceeds between the 3 grandchildren.

As the home passes to the grandchildren under the terms of Jocelyn’s will, the additional threshold of £150,000 will be available.

The direct descendants can also inherit the home if it’s left to them as a result of amending the will by a deed of variation. The terms of a will are replaced by the deed of variation, so the outcome of the deed is considered, rather than the wording of the will.

Trusts

A home, or a share of one could be either:

  • held in a trust before a person dies
  • transferred to a trust when they die

The availability of the additional threshold will depend on the type of trust.

This is because the type of trust will affect whether HMRC treats:

  • the home as part of a person’s estate for Inheritance Tax purposes
  • that person’s direct descendants as inheriting the home

Tapering away the additional threshold

The additional threshold will gradually reduce, or taper away for an estate worth more than £2 million, even if a home is left to direct descendants.

The additional threshold will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold.

Example

Ian dies in the tax year 2018 to 2019 leaving an estate worth £2,100,000 to his children. This includes a home worth £450,000.

The maximum additional threshold in the tax year 2018 to 2019 is £125,000.

The estate is worth more than the taper threshold of £2 million by £100,000.

The additional threshold tapers away by £1 for each £2 that the estate is more than the taper threshold. So the additional threshold is reduced by £50,000:

additional threshold £125,000 (lower of £450,000 and £125,000)
less amount of taper - £50,000
net additional threshold for the estate £75,000

If Ian’s estate was worth £2,250,000 or more, the additional threshold of £125,000 would be tapered away completely.

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

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

Ignore assets that are specifically excluded from Inheritance Tax.

Tapering and transfer of additional threshold

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 wasn’t used when the first of the couple died.

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 in turn reduces the amount of additional threshold that can be transferred to the surviving husband, wife or civil partner’s estate.

Example

Jeff dies in the tax year 2018 to 2019 leaving an estate worth £2,100,000.

He leaves his £450,000 home to his wife Jenny, and everything else to his children.

The maximum additional threshold in the tax year 2018 to 2019 is £125,000. But as Jeff’s children don’t inherit the home, his estate can’t use any additional threshold.

Without the effect of tapering, Jeff would have unused additional threshold of £125,000.

But Jeff’s estate is worth more than the taper threshold of £2 million by £100,000.

The additional threshold available to Jeff’s estate is tapered by £1 for each £2 over the taper threshold. So the additional threshold is reduced by £50,000.

If Jeff had left his home to his children, the additional threshold would have been £75,000 (£125,000 less £50,000). So the amount of his unused additional threshold is £75,000.

The percentage of unused additional threshold in Jeff’s estate is:

unused additional threshold £75,000
divided by maximum additional threshold in the tax year 2018 to 2019 ÷ £125,000
percentage of unused additional threshold 60%

Jenny dies in tax year 2020 to 2021, when the maximum additional threshold is £175,000.

She has an estate worth £1.8 million, including her home worth £500,000. She leaves all of this to her children.

The amount of additional threshold available to transfer to her estate is:

maximum additional threshold in tax year 2020 to 2021 £175,000
multiplied by the unused percentage x 60%
additional threshold to transfer £105,000

So Jenny’s estate qualifies for £175,000 additional threshold based on her estate, plus a further £105,000 transferred additional threshold from Jeff’s estate, to give a total additional threshold of £280,000.

Published 8 November 2016
Last updated 21 April 2017 + show all updates
  1. You can now use the additional threshold calculator to work out how much additional threshold an estate may be entitled to.
  2. First published.