At that level, a valuable relief begins to fall away, and the impact can be sharper than many expect.
Where the issue arises
Alongside the standard nil rate band, many families now rely on the Residence Nil Rate Band (RNRB). When a main residence passes to children or grandchildren, this provides an additional allowance of up to £175,000 per person.
For married couples, this means that in the right circumstances as much as £1 million can be passed on before inheritance tax is due.
Understandably, this has become a key part of many people’s expectations when thinking about their estate.
The point at which things change
The difficulty is that this additional allowance is not available in full to larger estates.
Once the value of an estate exceeds £2 million, the Residence Nil Rate Band starts to be withdrawn. The mechanism is simple enough, for every £2 above the threshold, £1 of the allowance is lost, but the effect is anything but.
What this means in practice is that the allowance disappears relatively quickly:
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modest increases above £2 million can already reduce the relief quite noticeably
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by around £2.35 million, an individual will have lost the allowance entirely
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for couples, the combined allowance is gone by approximately £2.7 million
So rather than a gradual increase in tax, there is a fairly narrow range where the position deteriorates quite rapidly.
Why this matters more than it first appears
It’s not just the loss of the allowance itself that causes concern; it’s the way this interacts with the tax rate.
As the estate grows within this band, it is both:
Taken together, the effective rate on that slice of the estate can be as high as 60%.
Why more people are being affected
This is no longer just an issue for those typically considered high-net-worth.
Proposed changes from April 2027, which are expected to bring unused pension funds into the scope of inheritance tax, are likely to widen this group significantly. When combined with rising property values and frozen tax thresholds, many more families are being drawn into the £2 million range.
Key takeaways
For many people, the key issue is simply awareness.
The Residence Nil Rate Band is often factored into planning almost by default, but its availability is more fragile than it first appears. Once an estate approaches £2 million, it becomes important to revisit assumptions and understand whether that allowance will still be there when it’s needed.
Early advice doesn’t necessarily mean complex planning, but it can make a meaningful difference to the outcome.
If you would like to review your position or explore ways to protect your family’s wealth, our team is here to help.