Inheritance tax on your main residence is charged at 40% on anything above your tax-free threshold, but if you leave the home to your children or grandchildren you can shield up to £500,000 as a single owner, or up to £1 million as a married couple or civil partnership. Getting to those figures depends on two separate allowances working together, on who inherits the property, and on the total size of your estate.
The Two Allowances That Shelter Your Home
Every individual has a nil rate band (NRB) of £325,000, which applies to any asset in the estate.1HM Revenue & Customs. Inheritance Tax Thresholds A second allowance, the residence nil rate band (RNRB), adds a further £175,000 when a qualifying home passes to direct descendants on death. Combined, that gives a single homeowner £500,000 of tax-free room. Everything above the combined threshold is taxed at 40%.2GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
Both bands are frozen at their current levels, and legislation keeps them frozen beyond April 2028.3GOV.UK. Inheritance Tax Nil-Rate Band, Residence Nil-Rate Band From 6 April 2028 With house prices continuing to rise while the thresholds stay fixed, more estates are being pulled into the IHT net each year.
Who Has to Inherit the Home
The £175,000 residence allowance only applies when the property is “closely inherited,” meaning it passes to direct descendants.4HM Revenue & Customs. Inheritance Tax Manual – IHTM46013 – Basic Definitions: Closely Inherited That covers children, grandchildren, great-grandchildren, and their spouses or civil partners. The definition also reaches step-children, adopted children, foster children, and children placed under a court-appointed guardian before they turned 18.5HM Revenue & Customs. Inheritance Tax Manual – IHTM46034 – More Detailed Guidance: Direct Descendants If a lineal descendant died before you but left a surviving spouse or civil partner who has not remarried, that person still counts.
Leaving the home to a sibling, niece, nephew, or friend does not qualify, however close the relationship. The property itself must also have been a home you actually lived in at some point during your ownership. A buy-to-let or investment property you never lived in will not attract the RNRB.6GOV.UK. Check if an Estate Qualifies for the Inheritance Tax Residence Nil Rate Band Trust arrangements can still qualify in some cases, but those situations need specific advice.
The £2 Million Taper That Removes the Extra Allowance
Larger estates lose the residence allowance through a clawback. Once the net estate value exceeds £2 million (calculated after debts but before exemptions or reliefs), the RNRB shrinks by £1 for every £2 above that threshold.7HM Revenue & Customs. Inheritance Tax Manual – IHTM46023 – Calculating the RNRB: Terms Used: The Taper Threshold At £2,350,000 the whole £175,000 has been tapered away.
The taper is measured against the entire estate, not just the home. Cash, investments, pensions with death benefits, life policies not written in trust, and other property all count toward the £2 million trigger. The £325,000 standard NRB is not affected by the taper, so that part of the threshold survives whatever the estate is worth.
How Married Couples Reach £1 Million
Transfers between UK-domiciled spouses and civil partners are completely exempt from inheritance tax, with no upper limit.2GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances The first death in a couple usually triggers no IHT, because everything passes to the survivor tax-free. Both allowances therefore go unused on the first death, but they are not lost.
The personal representatives of the second spouse to die can claim the transferred percentage of each band. If neither was touched on the first death, the second estate can use two full NRBs and two full RNRBs, sheltering up to £1 million.1HM Revenue & Customs. Inheritance Tax Thresholds The transfer works as a percentage, not a fixed sum. If the first spouse used 40% of their NRB, only the remaining 60% carries over, and that percentage is applied to whatever the NRB is at the time of the second death.
The claim for the transferred basic NRB must reach HMRC within two years of the second death.8GOV.UK. Transferring Unused Basic Threshold for Inheritance Tax Missing that deadline can cost an estate hundreds of thousands of pounds, so executors should treat it as a priority.
If You’ve Downsized or Sold the Home
Moving to a smaller property or into a care home does not automatically forfeit the residence allowance. Downsizing provisions introduced by the Finance Act 2016 protect families who would otherwise lose the RNRB because the deceased no longer owned a qualifying home at death.9GOV.UK. IHT: Changes to Residence Nil Rate Band
The disposal or downsize must have happened on or after 8 July 2015, and assets of equivalent value (a smaller home, cash from the sale, or other assets) must pass to direct descendants on death. Personal representatives work out what the RNRB would have been worth had the original property been kept, and that amount can then be claimed against other assets going to qualifying beneficiaries. Keep records of the original sale, purchase dates, and proceeds; without that paperwork the claim becomes hard to prove and the estate settlement slows down.
Giving the Home Away During Your Lifetime
This is where families most often go wrong. A parent who transfers their house to a child but keeps living there has made what HMRC calls a “gift with reservation of benefit.” The property stays in the estate for IHT purposes, as if the gift never happened.10GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Gifts The rule under the Finance Act 1986 is straightforward: give something away but continue to benefit from it, and it stays in your estate.11HM Revenue & Customs. Inheritance Tax Manual – IHTM14301 – Lifetime Transfers: Gifts With Reservation Paying full market rent to the new owner can sidestep the rule, but the arrangement has to be genuine and documented, and rarely works out cleanly in practice.
Outright gifts where you move out completely work differently. Survive seven years without benefiting from the property, and the gift falls outside your estate. Die within seven years and the gift is taxed, with the rate reducing on a sliding scale from year three onward, though only where the total value of gifts in the seven years before death exceeds the £325,000 NRB.10GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Gifts
One thing to weigh carefully: giving your home away removes it from your estate, which also removes the chance to use the £175,000 residence allowance against it, because there is no longer a home to be “closely inherited.” Anyone considering a lifetime transfer of their main residence should take professional advice before acting.
Paying the Bill When the Estate Includes a Property
The IHT return (form IHT400) must be submitted to HMRC within 12 months of the date of death, and interest starts accruing after six months.12HM Revenue & Customs. IHT400 Inheritance Tax Account Executors often need to pay some tax before they can get the grant of probate that lets them sell the house or reach the deceased’s bank accounts. That cash-flow squeeze catches many families off guard.
Where the estate includes a property that hasn’t been sold, executors can elect to pay the IHT attributable to it in ten equal annual instalments instead of a lump sum.13GOV.UK. Pay Your Inheritance Tax Bill: In Yearly Instalments The first instalment carries no interest unless paid late, but interest accrues on the outstanding balance from the second instalment onward. If the family plans to keep the home, this option makes the bill manageable. Selling the property cancels the arrangement, and the remaining balance becomes due immediately.