The residence nil-rate band (RNRB) can be a powerful tool for reducing Inheritance Tax (IHT)—but if your Will includes a trust, things can get a little more complicated. Let’s unpack how the RNRB works when a home is left in trust.
To recap: the RNRB is an extra allowance (currently £175,000) that applies when you leave your home to a direct descendant—typically a child, stepchild, adopted child, or grandchild. It’s on top of the standard nil-rate band of £325,000, and both are transferable between spouses or civil partners.
But what if you don’t leave the home outright? Many people use trusts in their wills—for example, to protect assets for children from a previous relationship, or to provide for a spouse while preserving the capital for the next generation. That’s where the rules get trickier.
The good news is that the RNRB can still apply if the home is left in a qualifying trust. The most common example is a life interest trust (also called an immediate post-death interest trust), where a spouse or child has the right to live in the property or receive income from it during their lifetime.
In this case, HMRC treats the beneficiary as if they own the property for IHT purposes—so the RNRB can still be claimed. But the trust must be set up correctly, and the beneficiary must be a direct descendant.
Where problems arise is with discretionary trusts. If the home is left into a discretionary trust—even if the potential beneficiaries include children or grandchildren—the RNRB usually doesn’t apply. That’s because no one has an automatic right to the property.
There are some exceptions. If the trustees appoint the property out of the trust to a qualifying beneficiary within two years of death, the RNRB can be restored. But this requires careful planning and prompt action.
It’s also worth noting that if the home is sold before death and the proceeds are left in trust, the downsizing rules may allow the RNRB to be preserved—but again, the trust must meet specific conditions.
At our firm, we regularly advise clients on how to structure their wills and trusts to make the most of the RNRB. We’ll help you balance tax efficiency with family protection, and ensure your wishes are carried out without unintended consequences.
If your will includes a trust—or you’re thinking of adding one—it’s essential to get advice on how it might affect your IHT position. The RNRB is too valuable to lose through a technicality.
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