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The £175,000 allowance was designed to protect the family home, but Parliament built in a quiet clawback for wealthier estates. The result above the threshold is an effective inheritance tax rate of 60% inside the taper band, even when the home passes to children.
Key Takeaways
- The £175,000 residence nil rate band applies when a qualifying home passes to direct descendants on death.
- For every £2 your net estate exceeds £2 million, the RNRB reduces by £1, falling to zero at £2,350,000 for an individual.
- A couple loses both RNRBs entirely once the combined estate on the second death reaches £2,700,000.
- Inside the taper range the effective inheritance tax rate is 60%, not the headline 40%.
- The £2 million threshold is frozen until April 2031, so more estates will breach it each year.
Key terms explained
Residence Nil Rate Band (RNRB). An additional inheritance tax allowance of up to £175,000 per person when a qualifying main residence passes to direct descendants on death, under the Finance Act 2015.
Taper threshold. The £2 million estate value above which the RNRB starts to reduce. Set out in Section 8D(5) of the Inheritance Tax Act 1984.
Net estate. Total assets less liabilities such as mortgages and funeral costs, valued before applying inheritance tax reliefs or exemptions.
How the £2 million taper threshold works
Once your net estate exceeds £2 million, the residence nil rate band reduces by £1 for every £2 of excess value. The taper applies to the net estate after deducting liabilities but before reliefs or exemptions. Section 8D(5) of the Inheritance Tax Act 1984 sets out the mechanism, and the threshold is frozen at £2 million until April 2031.
A £2,100,000 estate loses £50,000 of RNRB. A £2,200,000 estate loses £100,000. A £2,350,000 estate loses the full £175,000. The taper applies to each estate separately on the date of death. According to HMRC guidance, the test uses the value of the whole estate, not just the home itself.
Figure 1. RNRB tapering for an individual estate, 2026/27 tax year.
At what estate value does the residence nil rate band disappear completely?
For an individual, the RNRB falls to zero once the net estate reaches £2,350,000. For a married couple or civil partnership, both RNRBs are completely lost at £2,700,000 on the second death, assuming the full £350,000 combined allowance would otherwise have been available.
Above these levels only the standard £325,000 nil rate bands remain. The £1 million per couple headline only holds when the estate stays below the £2 million line.
Why the taper creates a 60% effective inheritance tax rate
Inside the taper range, every additional £2 of estate value triggers £1 of lost RNRB. That £1 is then taxed at 40%, on top of the 40% charge on the extra £2 itself. The result is a marginal effective inheritance tax rate of 60% on each pound between £2 million and £2,350,000.
An extra £200,000 above £2 million costs the estate £80,000 of inheritance tax on the band plus £40,000 of lost RNRB relief. £120,000 of tax on £200,000 of value. Restricting estate growth above £2 million is one of the most efficient planning moves available.
What counts towards the £2 million net estate test?
The test uses everything the deceased owned at death, including foreign property, immediate post-death interest trust assets, and business assets, minus liabilities such as mortgages and equity release. business relief and agricultural relief are ignored at this stage, even though they reduce the eventual inheritance tax bill.
A £1.5 million trading business qualifying for 100% business relief contributes nothing to the inheritance tax charge but still pulls the estate into the taper zone. Lifetime gifts behave differently: gifts made more than seven years before death fall out entirely, and even failed PETs sit outside the net estate for taper purposes. From April 2027, unused pensions enter scope under rules announced at Autumn Budget 2024, which will push more estates over the line.
Expert Perspective: what most people get wrong
Most readers crossing the £2 million line assume nothing can be done. That is rarely accurate. Lawful routes exist to bring an estate below the threshold or neutralise the lost RNRB: gift planning, the right trust architecture, business and agricultural relief positioning, and enough horizon for lifetime gifts to mature past seven years. At Bluebond, 19 out of 20 clients legitimately pay zero inheritance tax.
The other common oversight is the second-death bunching trap. When the first spouse leaves everything to the survivor, the entire combined estate is tested against £2 million on the second death. Two spouses with £1.4 million each can lose both £175,000 RNRBs if all assets land in the survivor’s estate. A nil rate band discretionary will trust or lifetime gifts can prevent this.
The misconception worth correcting: the RNRB is not the centrepiece of inheritance tax planning for estates above £2 million. The most a couple can shelter using both nil rate bands and both RNRBs is £1 million. Strategy for larger estates focuses on what sits inside the estate at death, not on preserving an allowance that only addresses the first £350,000.
Decisions to consider before your estate crosses £2 million
- Has the net estate been valued recently, including pensions coming into IHT from April 2027?
- Are jointly owned assets and trust interests counted in the correct estate for the £2 million test?
- Would lifetime gifts to direct descendants bring the estate below £2 million, with seven years to spare?
- Does the will use the spouse exemption at first death, or crystallise nil rate bands through a will trust?
- Are business or agricultural assets pulling the rest of the estate into the taper zone unnecessarily?
- Has forecast growth been modelled against the frozen £2 million threshold through to 2031?
What to avoid
- Assuming the £1 million per couple headline applies once the combined estate breaches £2 million. It does not.
- Leaving everything to the survivor on first death without testing the projected second-death estate.
- Treating business relief or agricultural relief as removing assets from the £2 million test.
- Relying on equity release to reduce the net estate without modelling its effect on the RNRB against the home.
- Delaying lifetime gifts until ill health makes the seven-year rule unlikely to be satisfied.
Frequently asked questions
Property & Business
How are pension pots treated for the £2 million RNRB taper test from April 2027?
Under rules announced at Autumn Budget 2024, unused pension pots come into the estate for inheritance tax from 6 April 2027. For families with substantial defined contribution pensions, this change alone will push many estates over the £2 million threshold and into the taper zone for the first time.
What happens to the RNRB if the home is left to a discretionary trust?
The RNRB is generally not available where the home passes into a discretionary trust, because the beneficiaries are not treated as closely inheriting. An appointment to a direct descendant within two years of death under Section 144 of the Inheritance Tax Act 1984 can preserve the relief.
Can lifetime gifts reduce the estate for taper purposes?
Yes. Outright gifts made more than seven years before death fall out of the estate entirely. Failed PETs, where the donor dies within seven years, remain chargeable for inheritance tax but are not counted in the net estate for the £2 million taper test. That makes a late-life gift one of the few levers that can preserve the RNRB on a borderline estate.
Where this leaves your planning
The £2 million threshold is frozen until April 2031 and more estates cross it each year. The next step is a clear view of where your estate sits and which planning levers fit.
You should carry out a review of how your assets are held and structured to highlight potential tax savings.
You should engage with a firm that can give you financial planning, tax advice, legal advice and accountancy advice under one client relationship, with regulated financial advice referred to our independent FCA-authorised partner firm and legal drafting handled by qualified solicitors employed within our business.
You should work with advisers who coordinate financial planning, tax advice and legal work under one client relationship — with clear disclosure of who is regulated for what. Bluebond Tax Planning Ltd provides tax planning and coordination only; any advice on your investments, personal pension or annuity is FCA-regulated and referred to our independent partner firm — no company in the Bluebond group is FCA-authorised or an SRA-authorised law firm. Individual outcomes depend on personal circumstances and cannot be guaranteed.
If you need any help or advice in this complex area please contact us. We will help you mitigate your inheritance tax.
Disclaimer. The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. UK tax legislation changes frequently, and the specific application of any rule or strategy depends on individual circumstances. Figures, thresholds, and reliefs mentioned are correct as of the 2026 to 2027 tax year unless otherwise stated. Before acting on any information here, consult a qualified adviser who has reviewed your full situation. Bluebond Tax Planning provides personal recommendations only under a signed client agreement, following a full review. Bluebond Tax Planning operates under UK legal frameworks and recognised professional conduct standards. Tax planning and legal work are not FCA regulated.
