WillsMitigating the RNRB Taper Threshold: The Role of Trusts

The Residence Nil Rate Band (RNRB) has become a key component in inheritance tax planning for married couples. The RNRB taper threshold (currently £2 million) is becoming is increasingly significant. As more estates approach the threshold, care planning is essential. This article covers what planning can be used to mitigate the impact of the taper.

Understanding the Allowances

The Nil Rate Band (NRB) is the standard inheritance tax threshold, currently £325,000 per person. The RNRB, in short, applies where a person leaves their main residence to their direct descendants and is an additional £175,000 per person. Both allowances are transferable between spouses if unused, so a married couple can potentially pass on up to £1 million tax-free.

There is however the RNRB taper threshold to consider. This is currently £2 million and is frozen at this value until April 2030. For every £2 that an estate is over this threshold, the RNRB is reduced by £1, and is lost entirely once the estate exceeds £2.35 million (or £2.7 million for a couple with full transferable RNRB).

The Problem: The Taper Trap

Many couples find their combined estates hovering around the £2 million RNRB taper threshold. If all assets pass to the surviving spouse on first death, the survivor’s estate may exceed the taper threshold, resulting in a significant loss of the RNRB on second death.

This problem is only going to become more commonplace in the coming years due to the proposed changes to make pensions taxable for inheritance tax from April 2027, as this will bring many more estates close to or above the RNRB taper threshold.

The Taper Trap Example

Mr and Mrs Brown have a combined estate valued at £2.4 million, including their family home. They have two children and wish to leave their estate to each other on first death, and then to their children on second death.

On Mr Brown’s death, all assets pass to Mrs Brown. No inheritance tax (IHT) is payable due to the spouse exemption. On Mrs Brown’s death, her estate is valued at £2.4 million.

If there was no taper threshold

If there was no RNRB taper threshold, inheritance tax would apply as follows:

• Total tax-free allowance: £650,000 (2x NRB) + £350,000 (2x RNRB) = £1 million
• Taxable estate: £2.4 million – £1 million = £1.4 million
• IHT: £1.4 million × 40% = £560,000

With the taper threshold

Due to the operation of the taper threshold however the RNRB is reduced by £1 for every £2 over the threshold for Mrs Brown’s estate. The estate is £400,000 over the threshold, therefore RNRB is reduced by £200,000. This leaves an available RNRB of £150,000.

Mrs Brown’s inheritance tax would therefore be calculated as follows:

• Total tax-free allowance: £650,000 (2x NRB) + £150,000 (tapered RNRB) = £800,000
• Taxable estate: £2.4 million – £800,000 = £1.6 million
• IHT: £1.6 million × 40% = £640,000

The additional inheritance tax due to the lost RNRB is therefore £80,000.

The Solution: Nil Rate Band Discretionary Trusts

A Nil Rate Band Discretionary Trust in a will can be a useful tool in these circumstances. On the first death, assets up to the NRB (currently £325,000) are diverted into a discretionary trust rather than passing outright to the surviving spouse. The trust can include the spouse and children as potential beneficiaries.

The trustees, guided by a letter of wishes, can allow the spouse to be the main beneficiary whilst they are alive. However, as the trust is a discretionary trust the trust fund is not taxed as part of the survivor’s estate on their death.

By removing these assets from the survivor’s estate, the total value on second death may be kept below the £2 million threshold, preserving the full RNRB, or keep the estate not as high above the taper threshold and ensuring more RNRB is available. This approach is particularly effective where the estate is just over the threshold and lifetime gifting is impractical.

Nil Rate Band Discretionary Trusts Example

Let’s return to Mr and Mrs Brown. Instead of leaving their estates to each other outright, they incorporate Nil Rate Band Discretionary Trusts.

On Mr Brown’s death, his estate up to his NRB passes to trust and the remainder to Mrs Brown. On Mrs Brown’s death, her estate is £2.075 million. £325,000 is outside of her estate held by the Nil Rate Band Discretionary Trusts.

Her estate is still over the taper threshold, but not as significantly as it was previously. It is only £75,000 over the threshold and therefore RNRB is reduced by £37,500. This leaves an available RNRB of £312,500.

Mrs Brown’s inheritance tax would therefore be calculated as follows:

• Total tax-free allowance: £325,000 (NRB) + £312,500 (tapered RNRB) = £637,500
• Taxable estate: £2.075 million – £637,500 = £1,437,500
• IHT: £1,437,500× 40% = £575,000

The use of a Nil Rate Band Discretionary Trust saves Mrs Brown’s estate £65,000 in inheritance tax.

Alternative – Nil Rate Band Gift

For couples seeking a simpler alternative to trusts, an alternative to using a Nil Rate Band Discretionary Trust is to make a direct gift of assets up to the NRB to children (or other beneficiaries) on first death. This achieves the same outcome of avoiding inflating the survivor’s estate above the taper threshold, without the additional complexity of a trust.

However, this approach is only suitable where the couple is comfortable with the children receiving assets outright on first death. It may not be appropriate in situations where:

• The children are young or financially inexperienced.
• There are concerns about future divorce or third party claims.
• The surviving spouse may need access to the full estate for financial security.

In such cases, a Nil Rate Band Discretionary Trust offers greater control and flexibility.

Conclusion

For couples whose estates are close to the RNRB taper threshold, Nil Rate Band Discretionary Trusts offer a useful and flexible inheritance tax planning tool. They can help preserve the RNRB while still allowing the surviving spouse to benefit. As inheritance tax continues to evolve, particularly with the proposed changes to pension taxation, Nil Rate Band Discretionary Trusts are likely to become an essential component of estate planning once again.

For more information on the use of Nil Rate Band Discretionary Trusts, please consider attending our webinar on 5 August 2025 where we will discuss this type of planning in more detail along with other uses of Nil Rate Band Discretionary Trusts. See our webinar page for further information.

 

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