The residence nil rate band (RNRB) remains one of the most valuable, yet persistently misunderstood, reliefs available for inheritance tax (IHT) planning. To de-muddy the water, Neil Macleod – Senior Technical Manager at M&G, shares some valuable insights in this Q&A style article.
On the surface, it appears simple: pass the family home to direct descendants and benefit from an additional allowance. In practice, however, the rules are laden with traps, particularly once larger estates and the RNRB taper come into play.
For paraplanners supporting advisers with higher value estates, understanding how the taper works and what feeds into it is essential.
Below are five of the most common technical questions that continue to arise.
1. How does the taper reduce the RNRB?
The RNRB is currently set at £175,000 per individual and is restricted to the value of a qualifying residential interest left to direct descendants.
Where conditions are met, any unused RNRB can be transferred from a deceased spouse or civil partner, potentially providing up to £350,000 of RNRB on second death.
However, the available RNRB is reduced where the value of an individual’s estate exceeds £2 million at death.
The taper operates by reducing the RNRB by £1 for every £2 by which the estate exceeds the £2m threshold.
By way of example, an estate valued at £2.3m exceeds the taper threshold by £300,000. This results in a £150,000 reduction in the RNRB.
In that scenario, a £175,000 allowance would be almost entirely eroded. Once the excess reaches £350,000, the individual’s RNRB is lost altogether.
Crucially, this calculation is mechanical and unforgiving. There is no discretion, and no ability to “average” values across spouses unless appropriate planning has taken place.
2. When does the taper apply?
Although the RNRB can be transferred between spouses and civil partners, it is vital to remember that the taper applies on both first and second death.
This can catch families out. Where the first spouse dies with an estate over £2m, their RNRB may be partially or wholly tapered away.
The surviving spouse can only transfer the percentage of the RNRB that was actually available on first death, not the full nominal allowance.
In practice, this can mean that by the time of second death, a substantial amount of transferable RNRB has already been lost.
For some couples, proactive equalisation of assets between spouses during lifetime may help keep both estates below the £2m threshold and preserve more of the allowance overall.
3. What counts as the “estate” for taper purposes?
The legislation refers, under IHTA 1984 s8(5)(d), to the value “E” when applying the taper. This is defined as:
“the value of the person’s estate immediately before the person’s death.”
Although this sounds deceptively simple, the definition of “estate” under section 5 is not! In essence, it includes all property:
- to which the deceased was beneficially entitled, and
- over which they had a general power of disposal.
Importantly, the value of “E” is calculated before applying any exemptions or reliefs. This point is frequently misunderstood.
Assets that ultimately bear little or no IHT can still increase the estate value for taper purposes and thereby reduce or eliminate the RNRB.
For example, assets qualifying for business relief or agricultural relief may benefit from 100% or 50% relief from IHT, but their full value is still included when assessing whether the £2m threshold has been exceeded.
The same principle applies to assets passing under the spouse exemption.
Even where an entire estate is left to a spouse or civil partner and no IHT arises on first death, the total value transferred still counts towards the taper calculation.
Gifts to charities, political parties, and other exempt beneficiaries are treated in the same way.
4. Are lifetime gifts included in the taper calculation?
Lifetime gifts are generally excluded from the estate value for the purposes of the RNRB taper.
This makes gifting one of the few effective methods of reducing an estate below the £2m threshold.
The key exception is where a gift is treated as a gift with reservation of benefit. In those circumstances, the gifted asset remains part of the donor’s estate and is fully included for taper purposes.
This distinction can be powerful in planning terms.
A client with a £3m estate could make a lifetime gift of £1m. Even if they were to die shortly afterwards (so the gift fails for IHT), the estate value for taper purposes would fall back to £2m, potentially restoring the full RNRB.
For a couple, this could reinstate up to £350,000 of allowance, a potential IHT saving of £140,000.
That said, relying on late stage gifting is inherently risky. Loss of capacity, market volatility, or sudden death may prevent the strategy being implemented in time.
As with most IHT planning, earlier action usually provides more certainty.
5. Are pensions included for RNRB taper purposes?
At present, most pension death benefits fall outside the estate and are therefore excluded from both IHT and the RNRB taper.
This is typically because the scheme trustees exercise discretion over who receives the benefits, meaning the member did not have a general power of disposal.
However, this protection is not universal. Pension benefits can fall into the estate where:
- the death benefits are payable directly to the estate,
- a retirement annuity contract is not written under trust,
- guaranteed annuity payments continue after death, or
- the member has the general power over the death benefits.
Occupational schemes can be particularly problematic, as scheme rules sometimes result in death benefits being payable to the estate by default.
From 6 April 2027, the position is set to change significantly. Under current proposals, most pension death benefits will be brought into the IHT net.
The only benefits expected to remain outside the taper calculation are death‑in‑service lump sums, dependant’s scheme pensions and trivial commutation lump sum death benefits.
In the case of a dependant’s scheme pension it appears that it will only be excluded where the dependant had no choice as to the benefit paid.
It has been confirmed that where the member purchased a joint life annuity, the continuing annuity on the member’s death will be excluded.
For advisers and paraplanners alike, this will fundamentally alter how pensions interact with the £2m threshold and will bring the RNRB taper into play for many more estates.
The RNRB can still deliver substantial IHT savings, but only where its interaction with estate values is properly understood.
For paraplanners, recognising how seemingly “exempt” or “relieved” assets feed into the taper calculation is often the difference between theoretical planning and real‑world outcomes.
Main image: estate planning, sasun-bughdaryan-HvmqfefQwYw-unsplash
