Mark McLaughlin looks at when a property is ‘closely inherited’ for inheritance tax residence nil-rate band purposes.
The ‘residence nil-rate band’ (RNRB) can shelter all or part of an individual’s residential property value from inheritance tax (IHT), if certain conditions are satisfied.
The maximum RNRB per individual is £175,000 (for 2025/26). If the family home was jointly owned by a married couple or civil partners, up to £350,000 per couple is available. When combined with the standard IHT nil-rate band of £325,000 each, the combined estate values of the couple for IHT purposes can therefore be reduced by up to £1m.
Let’s assume here that an individual’s will leaves their residential property to another individual (as opposed to a trust).
‘Closely’ inherited?
The residential property must be ‘closely inherited’ for the RNRB to potentially apply. This means a lineal descendant of the deceased, such as children, grandchildren, etc. (but note that ‘descendant’ excludes the deceased’s parents and grandparents, siblings, nieces and nephews, etc).
The definition of ‘closely inherited’ also includes the spouse (or civil partner) of a lineal descendant at the deceased’s death (broadly including their widow, widower or surviving civil partner, where the lineal descendant died before the deceased and the surviving spouse or civil partner has not remarried or entered into a new civil partnership).
The RNRB rules extend the meaning of ‘child’ as lineal descendants to include stepchildren, an ‘adopted person’, foster children, and children for whom a person was appointed by a court order as a guardian or special guardian if that appointment took effect when the child was under age 18. Lineal descendants of such children may also be included for RNRB purposes (see IHTA 1984, s 8K).
Mixture of both?
If the house is left to both a lineal descendant (e.g., daughter) and someone else (e.g., nephew), the value of the home must be shared in proportion to the share of the property inherited by each beneficiary to establish the amount of RNRB available.
If the deceased’s residuary estate includes the house, and the residuary beneficiaries are a lineal descendant (e.g., grandson) and a non-lineal descendant (e.g., cousin), HM Revenue and Customs (HMRC) considers that only 50% is closely inherited. An appropriation (under the administrative powers of the deceased’s personal representatives (PRs)) to the grandson of the cousin’s 50% share would not also make the interest eligible for the RNRB as being closely inherited (see HMRC’s Inheritance Tax Manual at IHTM46033).
However, the RNRB available in those circumstances (i.e., the value of the property interest inherited by the deceased’s grandson) might be sufficient to use the RNRB.
Example: When 50% was enough
Bob (a divorcee) had an estate on death including a residential property. Under Bob’s will, the residue of his estate included his flat, worth £350,000. The residuary beneficiaries are his son Ian and his friend Janice (i.e., 50% each).
Using their administrative powers, Bob’s PRs appropriate the flat to Ian in satisfaction of his half-share of Bob’s estate. However, whilst the whole flat now passes to Ian, it did so by virtue of the PRs’ administrative powers, not directly under the terms of Bob’s will. Thus, only a 50% interest in the flat (worth £175,000) is closely inherited by Ian.
Nevertheless, this is sufficient to use Bob’s RNRB in full.
Practical tip
It may be possible for a lineal descendant to inherit the deceased’s home if left to them by amending the deceased’s will using a deed of variation. However, professional assistance is strongly recommended.
