Inheritance tax on death: nil-rate band, residence nil-rate band and charity exemption
Seamus, a widower, died in July 2026, domiciled in England. He made no lifetime gifts, and no unused nil-rate band or residence nil-rate band is available to transfer from his late wife. His estate is worth £1,000,000, including his home, worth £400,000. By his will he leaves £50,000 to a registered charity, his home to his daughter, Niamh, and the residue (£550,000) to his nephew, Declan. Assume a nil-rate band of £325,000, a maximum residence nil-rate band of £175,000, a death rate of 40%, and that the estate does not qualify for the reduced rate for charitable giving. There are no debts and no other reliefs.
How much inheritance tax is payable on Seamus's death estate?
Choose one answer to see the reasoning.
Worked answer
Correct answer E: £180,000.
THE RULE TO REMEMBER
On death, exempt gifts (e.g. to charity) are deducted, then the residence nil-rate band (home to direct descendants) and nil-rate band, with tax at 40% on the excess.
Inheritance tax on death: nil-rate band, residence nil-rate band and charity exemption
The £50,000 gift to a registered charity is exempt, so the chargeable estate is £1,000,000 − £50,000 = £950,000. Seamus's home passes to his daughter, a direct descendant, and his estate is below the £2 million taper threshold, so the residence nil-rate band is available. It is the lower of the maximum (£175,000) and the value of the home inherited by direct descendants (£400,000), so £175,000. HMRC's guidance explains that the residence nil-rate band is added to the basic threshold where the qualifying conditions are met. No bands are available to transfer from his late wife. Deducting the residence nil-rate band (£175,000) and the nil-rate band (£325,000) leaves £450,000 taxable. At 40%, inheritance tax of £180,000 is payable. The gift of residue to a nephew is not exempt, and the residence nil-rate band is available because the home itself passes to Niamh.
Why A is wrong: This omits the residence nil-rate band: (£950,000 − £325,000) × 40%; Niamh is a direct descendant inheriting the home.
Why B is wrong: This treats the charity gift as chargeable: (£1,000,000 − £500,000) × 40%; gifts to charity are exempt.
Why C is wrong: This applies the 36% charity rate, which the question states does not apply.
Why D is wrong: This doubles the residence nil-rate band; no unused band is transferable from the late wife here.
A little more practice done.
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