Inheritance Tax on lifetime transfers and transfers on death - Residential nil rate band

Learning Outcomes

After studying this article, you will be able to explain how Inheritance Tax (IHT) applies to both lifetime transfers and transfers on death, with a particular focus on the Residential Nil Rate Band (RNRB). You will be able to identify when the RNRB applies, calculate its value (including tapering and downsizing relief), and apply these rules to SQE1-style scenarios. You will also understand the interaction between the RNRB, the standard nil rate band, and other IHT reliefs.

SQE1 Syllabus

For SQE1, you are required to understand the practical application of IHT rules to both lifetime gifts and death estates, especially where a residence is involved. In your revision, focus on:

  • the distinction between potentially exempt transfers (PETs), chargeable lifetime transfers (CLTs), and exempt transfers
  • the calculation and application of the standard nil rate band (NRB) and the residential nil rate band (RNRB)
  • eligibility criteria for the RNRB, including the meaning of "qualifying residential interest" and "direct descendants"
  • the tapering of the RNRB for estates exceeding the threshold
  • the transferability of unused RNRB between spouses/civil partners
  • the downsizing addition and its calculation
  • the order of applying reliefs and the impact of other reliefs (e.g., business property relief) on the RNRB
  • how to approach SQE1 questions involving complex estates with multiple reliefs and thresholds

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the maximum residential nil rate band (RNRB) available for an individual in the current tax year, and under what conditions can it be claimed?
  2. How does the RNRB taper for estates exceeding the £2 million threshold?
  3. What is the effect of downsizing on the RNRB, and how is the downsizing addition calculated?
  4. Can the RNRB be transferred between spouses or civil partners? If so, how is the transferred amount determined?

Introduction

Inheritance Tax (IHT) is charged on the value of a person's estate at death and, in some cases, on gifts made during their lifetime. The standard nil rate band (NRB) and the residential nil rate band (RNRB) are two key allowances that can reduce or eliminate IHT liability. The RNRB, in particular, is a complex area that often features in SQE1 assessments, especially where estates include a home passing to children or grandchildren. This article explains the rules for IHT on lifetime transfers and on death, focusing on the RNRB, its eligibility criteria, calculation, tapering, transferability, and the downsizing addition.

IHT on Lifetime Transfers and Death

IHT may arise in three main situations:

  • On death, when the value of the estate is assessed
  • On certain gifts made during lifetime (lifetime transfers)
  • On failed potentially exempt transfers (PETs) if the donor dies within seven years

Key Term: potentially exempt transfer (PET)
A lifetime gift to an individual that is exempt from IHT if the donor survives seven years, but becomes chargeable if the donor dies within that period.

Key Term: chargeable lifetime transfer (CLT)
A lifetime gift (usually to a trust or company) that is immediately chargeable to IHT, often at a reduced rate, with further tax if the donor dies within seven years.

Key Term: nil rate band (NRB)
The threshold up to which an estate or lifetime transfer is not subject to IHT. The NRB is currently £325,000 per person.

Key Term: residential nil rate band (RNRB)
An additional IHT allowance available when a qualifying residence is left to direct descendants. The RNRB is currently £175,000 per person.

The Residential Nil Rate Band (RNRB)

The RNRB is designed to reduce IHT for estates that include a home passing to children or other direct descendants. It is available in addition to the standard NRB.

Eligibility for the RNRB

The RNRB is only available if all of the following are satisfied:

  • The deceased owned a "qualifying residential interest" at death (i.e., a property that was their residence at some point)
  • The property (or a share in it) is "closely inherited" by direct descendants (children, grandchildren, stepchildren, adopted children, children in out-of-home care, or their spouses/civil partners)
  • The net value of the estate does not exceed the taper threshold (£2 million)

Key Term: qualifying residential interest
A property (or share) that was the deceased's residence at some time during their ownership.

Key Term: direct descendant
A child, grandchild, stepchild, adopted child, child in out-of-home care, or the spouse/civil partner of any of these.

Amount of the RNRB

The maximum RNRB is currently £175,000 per person. It is capped at the value of the deceased's interest in the residence. If the value of the residence is less than the maximum RNRB, only the lower value is available.

Tapering of the RNRB

If the net value of the estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over the threshold. This means that for estates of £2.35 million or more, the RNRB is fully tapered away.

Transferability of the RNRB

If a person dies without using all of their RNRB (e.g., because their estate passes to a spouse), the unused percentage can be transferred to the surviving spouse or civil partner. The survivor's estate can then claim up to double the RNRB in force at their death.

Downsizing Addition

If the deceased sold or downsized their home after 8 July 2015 and left assets to direct descendants, the estate can claim a "downsizing addition" to preserve the RNRB. The downsizing addition is the lower of:

  • The RNRB lost due to downsizing/sale
  • The value of assets left to direct descendants (other than the residence)

Order of Applying Reliefs

When calculating IHT, apply business property relief (BPR) and agricultural property relief (APR) before the NRB and RNRB. However, for RNRB tapering, the estate value is assessed before deducting BPR or APR.

Worked Example 1.1

Scenario:
Amira dies in 2023, leaving an estate worth £2.3 million, including a home valued at £600,000. She leaves the home to her son and the rest to her daughter. Amira's husband died previously, leaving his entire estate to Amira.

Question:
How much RNRB is available for Amira's estate?

Answer:
The estate exceeds the £2 million threshold by £300,000. The RNRB is reduced by £1 for every £2 over the threshold: £300,000 ÷ 2 = £150,000. The maximum RNRB is £175,000. £175,000 - £150,000 = £25,000.
Amira can also claim her late husband's unused RNRB (100%), so the total available is £25,000 × 2 = £50,000, capped by the value of the home. The estate can apply £50,000 RNRB.

Worked Example 1.2

Scenario:
James sold his home in 2018 for £400,000 and moved into rented accommodation. He left £200,000 of the sale proceeds to his daughter and the rest of his estate to charity. He dies in 2023.

Question:
Can James's estate claim the RNRB?

Answer:
Yes, the estate can claim a downsizing addition. The maximum RNRB is £175,000. The downsizing addition is the lower of £175,000 (the RNRB lost) and £200,000 (assets left to a direct descendant). The estate can claim the full £175,000 RNRB.

Exam Warning

For SQE1, always check the value of the estate before reliefs when assessing RNRB tapering. Do not deduct business or agricultural reliefs before applying the taper.

Revision Tip

When answering SQE1 questions, always identify:

  • Whether the estate includes a qualifying residence
  • Who inherits the property
  • The net value of the estate
  • Whether any unused RNRB can be claimed

Interaction with Other Reliefs

The RNRB is applied after business property relief and agricultural property relief. However, for the purposes of tapering, the gross estate value is used before these reliefs.

Worked Example 1.3

Scenario:
Priya's estate is worth £2.4 million, including a business worth £600,000 (qualifying for 100% BPR) and a home worth £800,000. She leaves the home to her children and the business to her nephew.

Question:
How much RNRB is available?

Answer:
The gross estate is £2.4 million. The excess over £2 million is £400,000, so the RNRB is reduced by £200,000. The maximum RNRB is £175,000, so the RNRB is fully tapered away (£175,000 - £200,000 = £0). No RNRB is available, even though the business property is relieved from IHT.

Downsizing and the RNRB

If a person downsizes or sells their home after 8 July 2015 and leaves assets to direct descendants, the estate can claim a downsizing addition. The calculation is complex but, in practice, the downsizing addition is capped at the lower of the lost RNRB and the value of assets left to direct descendants.

Transfer of Unused RNRB

If the first spouse or civil partner to die does not use all of their RNRB (e.g., because their estate passes to their spouse), the unused percentage can be transferred to the survivor. The survivor's estate can then claim up to double the RNRB in force at their death.

Worked Example 1.4

Scenario:
John dies in 2017, leaving his entire estate to his wife, Mary. Mary dies in 2023, leaving her home to her son. The RNRB in 2023 is £175,000.

Question:
How much RNRB can Mary's estate claim?

Answer:
Mary's estate can claim her own RNRB (£175,000) plus 100% of John's unused RNRB (£175,000), for a total of £350,000, capped by the value of the home.

Application to Lifetime Transfers

The RNRB only applies to transfers on death. It does not apply to lifetime gifts, even if the property is given to a direct descendant. However, if a gift of a residence is made during lifetime and the donor continues to benefit from it (e.g., by living there rent-free), the gift is treated as a "gift with reservation of benefit" and the property is included in the death estate for IHT purposes.

Key Term: gift with reservation of benefit
A gift where the donor continues to benefit from the property after making the gift. For IHT, the property is treated as still belonging to the donor at death.

Key Point Checklist

This article has covered the following key knowledge points:

  • The RNRB is an additional IHT allowance for homes left to direct descendants.
  • The maximum RNRB is £175,000 per person, but it is reduced for estates over £2 million.
  • The RNRB can be transferred between spouses/civil partners if unused.
  • The downsizing addition preserves the RNRB if a home is sold or downsized after 8 July 2015.
  • The RNRB only applies to transfers on death, not to lifetime gifts.
  • For RNRB tapering, use the gross estate value before other reliefs.
  • Always check eligibility, value, and inheritance by direct descendants in SQE1 scenarios.

Key Terms and Concepts

  • potentially exempt transfer (PET)
  • chargeable lifetime transfer (CLT)
  • nil rate band (NRB)
  • residential nil rate band (RNRB)
  • qualifying residential interest
  • direct descendant
  • gift with reservation of benefit
The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.
No resources available.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
Assessment Day
One-time Fee
$20-39
Barbri SQE
One-time Fee
$3,800-6,900
BPP SQE
One-time Fee
$5,400-8,200
College of Legal P...
One-time Fee
$2,300-9,100
Job Test Prep
One-time Fee
$90-350
Law Training Centr...
One-time Fee
$500-6,200
QLTS SQE
One-time Fee
$2,500-3,800
University of Law...
One-time Fee
$6,200-22,400

Note the above prices are approximate and based on prices listed on the respective websites as of May 2025. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

All-in-one Learning Platform

Everything you need to master your assessments and job tests in one place

  • Comprehensive Content

    Access thousands of fully explained questions and cases across multiple subjects

  • Visual Learning

    Understand complex concepts with intuitive diagrams and flowcharts

  • Focused Practice

    Prepare for assessments with targeted practice materials and expert guidance

  • Personalized Learning

    Track your progress and focus on areas where you need improvement

  • Affordable Access

    Get quality educational resources at a fraction of traditional costs

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal