Inheritance Tax and the Family Home: UK Decision Guide

For most people the family home is the single largest asset they will ever own, so it usually decides the size of the inheritance tax bill. The real question is not whether IHT applies to it but which of four routes you take, and each one trades tax saved against cash, capital gains, and where your family will actually live. The four routes below are worked against one family, the Holloways, so you can compare them in figures rather than abstractions.

The four routes:

• Route A. Do nothing structural. Rely on the Residence Nil Rate Band, transferable spouse allowances, and the CGT uplift on death.
• Route B. Gift the house in your lifetime but pay full market rent to keep living there, per FA 1986 Sch 20 para 6(1)(a).
• Route C. Gift an undivided share of the home and genuinely share occupation with the person you give it to, per FA 1986 s.102B(4).
• Route D. Leave the home in your will as an Immediate Post-Death Interest (IPDI) for the surviving spouse, with the capital going to the children, per IHTA 1984 s.49A.

Route A is what happens if you do nothing. Routes B and C are lifetime gifts that try to start the seven-year PET clock cleanly. Route D is a will route that uses the spouse exemption and the second-death allowances together. Pick by your age, your health, the capital gains position on the property, and whether there is a surviving spouse to protect.

The RNRB architecture

The Residence Nil Rate Band sits at IHTA 1984 ss.8D to 8M, inserted by Finance (No. 2) Act 2015 and Finance Act 2016 with effect for deaths on or after 6 April 2017. The headline mechanics:

• RNRB amount: £175,000 per individual, frozen until 5 April 2031.
• Qualifying residential interest (s.8H): a property the deceased used as a residence at some point. Pure buy-to-let property never used by the deceased as a home does NOT qualify.
• Closely inherited (s.8H): passes to a lineal descendant. Per s.8K: children (including step, adopted, fostered), grandchildren, great-grandchildren, and the spouses or civil partners of those descendants. Nieces, nephews, siblings, and unrelated beneficiaries do NOT qualify.
• Taper: withdrawn £1 for every £2 of net estate above £2,000,000 (s.8D(5)). Fully extinguished at £2,350,000 (single) or £2,700,000 (couple with full transferable RNRB).
• Transferable RNRB (s.8G + s.8L): unused percentage transfers to surviving spouse, claimed on form IHT436 within two years of second death.

The lineal-descendants rule trips people up more than any other part of the RNRB. A widow leaving the home to a niece gets the £325,000 NRB on it, full stop. No RNRB. The same widow leaving it to a grandchild gets the full £175,000 RNRB plus any transferable amount from her late husband. Who you leave the home to is doing real work, not just where it goes.

The downsizing addition

Per IHTA 1984 ss.8FA to 8FE, if you sold a more valuable home on or after 8 July 2015 and either bought a smaller one or did not replace it at all, the RNRB that would have applied to the larger home is preserved on your death, provided equivalent value (cash or other assets) passes to lineal descendants. So if you are asking "I sold the family home to move into a flat, have I lost my RNRB?", the answer is almost always no. The downsizing addition keeps it for you.

The Holloway-family worked example

Mrs Holloway is a widow, age 72. The family home in north London is worth £900,000 (she and her husband bought it in 1988 for £85,000, so there is a latent gain of around £815,000). She also has stocks and an ISA worth £400,000 and £200,000 in cash, giving a net estate of £1,500,000. Her husband died in 2020 with his full nil rate band and full RNRB unused; the transferable amounts are already claimed on IHT402 and IHT436, and spouse exemption covered the first death with no IHT paid.

Two adult children, both in their 40s, both with their own homes. Mrs Holloway is healthy, lives independently, and is starting to think about the IHT exposure on her death.

Route A: rely on RNRB and transferable allowances

Mrs Holloway does nothing structural. She updates her will to ensure the home and residuary estate pass to her two daughters. Death assumed in 2032.

• Available allowances: NRB £325k + TNRB £325k + RNRB £175k + TRNRB £175k = £1,000,000.
• Net estate £1,500,000; above allowances by £500,000.
• IHT at 40% on £500k = £200,000.
• Both daughters inherit at probate value; the latent £815k gain is wiped by the s.62 CGT uplift on death. No CGT.

Route A is the baseline: £200,000 of IHT, zero CGT, and nothing changing in your life or cash flow while you are alive. For a lot of families this is where the analysis rightly ends.

Route B: lifetime gift with full market rent

Mrs Holloway gifts the house to her daughters in March 2026. She continues to live in it. To stay clear of GROB she pays full market rent, agreed at £36,000 per year by reference to local lettings comparables, paid monthly by bank standing order, with the daughters declaring half the rent each on their self-assessment returns.

• CGT on the lifetime gift: connected-party disposal under TCGA 1992 s.17 at market value. Gain £815,000 (subject to private residence relief for the period Mrs Holloway has occupied; PRR likely wipes the gain on a home she has occupied as principal residence throughout). If the home has always been her principal residence, CGT on the lifetime gift is zero.
• Income tax on the rent: daughters declare £18,000 each per year. At 40% marginal rate (assuming both higher-rate taxpayers), £7,200 each per year, £14,400 combined. Over 7 years, ~£100,800 of income tax.
• IHT outcome if Mrs Holloway survives 7 years from the gift: house outside estate. Net estate at death £600,000 (ISA + cash). Below combined allowances. IHT zero.
• If Mrs Holloway dies inside 7 years: the gift fails as a PET, comes back into the estate at gift-date value, taper relief applies to the IHT charge (not the asset value) per s.7(4).

Route B works best when you are in good health at the gift date and the home has full PRR cover to wipe out the CGT. The rent is the catch: it is real cash leaving your pocket every year for the rest of your life and landing with your children, where it is taxed at their marginal rate. At 65 to 70 with your health intact the route is genuinely attractive; at 75 and over, with the seven-year clock far less certain, it is much harder to justify.

Route C: s.102B(4) shared-occupation undivided share

Mrs Holloway's younger daughter is divorced and looking to move back in. They agree the daughter will give up her rented flat and live with Mrs Holloway in the family home as her main residence. Mrs Holloway gifts a 50% undivided share to that daughter. Both occupy the property as their joint home. Each pays half the council tax, half the utilities, half the buildings insurance. Mrs Holloway receives no benefit from the daughter beyond the genuine shared occupation.

• CGT on the lifetime gift: 50% of the £815k gain = £407,500 of gain. PRR wipes the portion attributable to Mrs Holloway's principal-residence period. If PRR is full, CGT zero.
• GROB: not applicable per s.102B(4). The undivided-share gift is clean; the seven-year PET clock starts on the gift date.
• IHT outcome at 7 years' survival: 50% of the house (£450,000 at gift date, with subsequent growth on the daughter's slice outside the estate) is outside the IHT calculation. The remaining 50% sits in the estate at death value.
• Assuming death in 2032 with the home at £1,000,000, the in-estate slice is £500,000. Plus £600,000 ISA + cash = £1,100,000 net estate. Above £1m combined allowances by £100,000. IHT 40% on £100k = £40,000. The other £160k of Route A's IHT is saved.

Where the living arrangement genuinely supports shared occupation, Route C is the cleanest way to save IHT. The conditions are not box-ticking, though: the daughter has to actually live there, the bills have to be shared, and she cannot quietly move back out three years later, because the moment the arrangement changes GROB re-attaches. Both of you have to hold that discipline for the whole period, not just at the start.

Route D: testamentary IPDI (not directly applicable to Mrs Holloway)

Mrs Holloway is already widowed, so for her the IPDI route is in the past, not the future. If you are still married or in a civil partnership, though, it is the most common defensive move. The will of the first spouse to die settles the home (or a share of it) into a will trust with the survivor as life tenant. As life tenant the survivor has the right to occupy the home and to take any rental income from it, but cannot touch the capital, which the trustees hold for the children. On the second death that capital passes to the named remaindermen, usually the children.

• First death: spouse exemption under s.18 applies to the trust transfer (the surviving spouse is treated as beneficially entitled to the trust capital per s.49(1A)). No first-death IHT.
• During the surviving spouse's life: the trust property counts as part of the survivor's estate for IHT, even though the survivor cannot get at the capital itself.
• Second death: trust value falls into the life tenant's estate for IHT but full TNRB + TRNRB are available; capital passes to the children outside the surviving spouse's personal-estate planning. Defensive against the survivor remarrying and the home being lost to the children.

Route D's defensive value is highest where the children are from a previous marriage, where the survivor is financially vulnerable to a future partner, or where the first-to-die wants to lock the children into eventual ownership without removing the survivor's right to live in the home.

The GROB traps in plain English

Three statutory provisions catch lifetime gifts of the family home where the donor stays in occupation:

• FA 1986 s.102: the general GROB rule. Where the donor reserves any benefit, the gift is treated as still in the estate at death value.
• FA 1986 s.102A: the interests-in-land rule, added in 1999 specifically to close the lease-carve-out route from Ingram v IRC [1999] STC 37 (HL). Where the donor gifts an interest in land and retains a benefit, the whole interest stays in the estate.
• FA 1986 s.102B: the undivided-share rule. Most gifts of undivided shares fall in to s.102, but s.102B(4) carves out the genuine shared-occupation case.

Two statutory carve-outs survive:

• Full market rent (Sch 20 para 6). Pay the donee a commercial rent and the GROB rule does not apply.
• Shared occupation of an undivided share (s.102B(4)). Both donor and donee occupy as joint home; donor receives no benefit beyond negligible.

The case law has tightened both sides. Buzzoni v HMRC [2013] EWCA Civ 1684 set out the donor-detriment test for what constitutes a reserved benefit; the Court of Appeal held that a benefit only counts if it is enjoyed at the donee's expense. Phizackerley v HMRC [2007] STC (SCD) 328 caught a cohabiting spouse's half-share gift despite the parties' belief in the carve-out. CIR v Eversden [2003] EWCA Civ 668 closed the spouse-exemption GROB scheme, with FA 2003 statutorily confirming the closure.

The practical filter for the family home is short. If you carry on living in a property after gifting it, either you pay full market rent and document it, or whoever you gave it to genuinely shares the occupation and the s.102B(4) conditions are met. There is no third route that survives contact with HMRC.

For the full statute walkthrough and case-law, see our GROB s.102 family home shared occupation s.102B UK mechanics page, and our gift with reservation of benefit guide for the basics.

The CGT silent killer

The thing most back-of-envelope calculations miss is the capital gains uplift on death under TCGA 1992 s.62. Beneficiaries inherit at probate market value, and the gain that built up during your ownership is wiped out for CGT purposes. Gift the asset in your lifetime instead and you throw that away.

For a family home you have lived in throughout as your main residence, the CGT on a lifetime gift is usually zero, because PRR (private residence relief under TCGA 1992 s.222) covers the gain. Where CGT bites hardest is appreciated property that is not your main home: an inherited buy-to-let, somewhere you moved out of years ago, a second home. Gift one of those in your lifetime and it crystallises 24% residential CGT on the gain straight away, with no holdover available (s.260 holdover needs a chargeable transfer, and non-business property gifted as a PET is not one).

So the right order of the routes depends entirely on which asset you are looking at. For the main-residence family home with full PRR cover, the lifetime gift routes (B and C) are CGT-clean. For a long-held buy-to-let with no PRR, the same routes can be a disaster: the £200k of IHT you save vanishes against £150k or more of CGT.

Intestacy: what happens if there is no will

Under the Administration of Estates Act 1925 ss.45-49 (as amended by the Inheritance and Trustees' Powers Act 2014 and most recently SI 2023/758), the distribution where there is no will:

• Spouse and children: spouse takes personal chattels, statutory legacy £322,000 (SI 2023/758 from 26 July 2023), and half the residue absolutely; children share the other half on statutory trusts.
• Spouse, no children: spouse takes the whole estate.
• No spouse, children: children take the whole estate equally on statutory trusts.
• No spouse, no children: parents, then full siblings, then half siblings, then grandparents, then full uncles and aunts, then half uncles and aunts, in the statutory hierarchy at s.46.

The family home does not pass to the spouse automatically. Where the home is worth more than the statutory legacy plus the spouse's share of residue, the spouse can elect under Sch 2 of the 1925 Act to take the matrimonial home in or towards satisfaction of their entitlement, paying equality money to the other beneficiaries for the difference. Without that election the home is sold and the proceeds split.

The practical point is blunt: intestacy almost never lands the home where you would have wanted it, and it can force a sale your family did not want. A will costs £200 to £600 at a high street firm and is the cheapest piece of estate planning you will ever buy.

Deed of variation: the post-death redirection

A deed of variation is the second chance. Per IHTA 1984 s.142, if you inherit under a will or an intestacy you can redirect what you receive within two years of the death and elect for the redirection to be treated, for IHT, as if the person who died had made it. The classic family-home case: a will leaves the home to the surviving spouse outright, the spouse already has more than enough, so she varies her inheritance to send the home to the children instead, using up the first spouse's RNRB rather than wasting it.

The deed has to be in writing, signed within two years of death, and carry the s.142 election. There is a parallel CGT election under TCGA 1992 s.62(6). For how it is actually done, see our deed of variation page.

The decision sequence

If you are starting from a blank sheet, work through the questions in this order:

1. Is the home your principal residence with full PRR cover? If yes, CGT is not blocking the lifetime gift routes.
2. Are you married or in a civil partnership with full transferable allowances available? If yes, the £1m combined allowance often eliminates IHT below £1m net estate.
3. Is the home passing to direct lineal descendants? If no, RNRB is unavailable and the calculation is harsher.
4. Is the net estate above or below the £2m taper threshold? If above, the marginal 60% in the taper zone changes the planning maths sharply.
5. Is there a realistic family living arrangement that would support the s.102B(4) shared-occupation route? If yes, that is often the cleanest lifetime route.
6. Are you in robust health at 65 to 72? If yes, the full-market-rent route is viable. At 75 and over, the seven-year clock is too uncertain to rely on.
7. Is there a surviving spouse who would benefit from IPDI protection? If yes, the will trust is your defensive overlay.

It will not run in a straight line in practice. You will come back to these questions at different stages of life and shift the mix of routes as your health, your wealth, and how your family lives all change.

Where to read next

• GROB s.102 family home shared occupation s.102B UK mechanics. The statute and case-law in full.
• IHT residence nil rate band £2m taper property portfolios. How the taper hits portfolio estates.
• Inheritance tax rental property UK guide. IHT across a rental portfolio.
• IHT property investors decision framework 2026 onwards. The wider IHT decision for investors.
• IHT spouse exemption and long-term resident election. Spouse exemption and the long-term-resident rules.
• IHT lifetime gifts 7-year rule property taper. How taper relief works on lifetime gifts.
• IHT 7-year clock property gifting mid-life landlord strategy. Timing gifts around the seven-year clock.
• Deed of variation property estate. Redirecting an inheritance after a death.
• April 2026 BPR and APR cap property impact. What the 2026 reform changes.
• Pension IHT April 2027 landlord estate planning. Pensions coming into IHT from 2027.
• Inheritance tax: a brief summary. A plain starting point on IHT.
• Gift with reservation of benefit. GROB explained from scratch.
• Inheritance tax: lifetime gifts vs transfer at death. Giving in life versus leaving at death.
• Inheriting a house in the UK. The same picture from the beneficiary's side.

The bigger picture

No other asset sits across IHT, CGT, and where your family actually lives the way the family home does. For most people the honest answer is that Route A, doing nothing structural, is the right default. The £1,000,000 combined allowance, the CGT uplift on death, and the sheer simplicity of leaving things alone deal with most middle-income estates without the cost and risk of giving the house away in your lifetime.

Routes B and C earn their complexity once you are over the £1m allowance, or where the £2m RNRB taper starts to bite. Route D earns its where there is a surviving spouse to protect, children from a previous marriage, or assets you want locked down for the next generation.

The framework has been stable since the RNRB came in on 6 April 2017, and the freeze now runs to 5 April 2031. The reforms landing in 2026 and 2027 (the BPR and APR cap, and pensions coming into IHT) do not change the family-home routes themselves, but they do change the size of the estate the home is being valued inside. The four routes hold; it is the figures around them that move with the wider reform calendar.