01

The nil rate band — mechanics and the seven-year interaction

The nil rate band (NRB) of £325,000 is the amount of a deceased person's estate that is taxed at 0% for IHT purposes. Any excess above the NRB is taxed at 40% (reduced to 36% if at least 10% of the net estate is left to qualifying charities).

The NRB is used up in a specific order. First, it is applied against chargeable lifetime transfers (CLTs) made in the seven years before death — gifts into discretionary trusts that exceeded the NRB on entry. Second, it is applied against potentially exempt transfers (PETs) — direct gifts to individuals that fail because the donor died within seven years. Third, the remaining NRB is applied against the death estate itself.

This ordering means that significant lifetime gifting — particularly gifts into discretionary trusts — can erode the NRB available on death. A person who gifted £200,000 into a discretionary trust five years before death has only £125,000 of NRB remaining to apply against the death estate. If the death estate is £500,000, IHT is charged on £375,000 (£500,000 minus £125,000 remaining NRB) at 40% = £150,000. Without the prior trust gift, IHT would be £70,000 (£500,000 minus £325,000 NRB). The trust gift, despite removing £200,000 from the estate, has actually increased the IHT liability on the death estate — because the trust gift consumed £200,000 of NRB that would otherwise have been available.

02

Transferable nil rate band — the mechanics and the claim process

When a spouse or civil partner dies without using any of their NRB, the unused proportion transfers to the survivor — and is available to be added to the survivor's own NRB on their death. This is the transferable nil rate band (TNRB), introduced in the Finance Act 2008.

If the first spouse dies leaving their entire estate to the survivor (using the unlimited spousal exemption — assets passing between spouses are exempt from IHT regardless of value), 100% of the first spouse's NRB is unused and transfers in full. The surviving spouse therefore has up to 200% of the NRB available on their death — £325,000 × 2 = £650,000.

The TNRB claim is not automatic — it must be claimed by the personal representatives of the surviving spouse on the IHT400 return. The claim can be made at any time before the second spouse's estate is settled — and there is no time limit for making the claim. HMRC will accept TNRB claims decades after the first spouse's death provided the documentation (death certificate, probate records of the first estate) can be produced.

Important: the TNRB transfers as a proportion, not an absolute amount. If the first spouse used 50% of their NRB during their lifetime (for example, by making a £162,500 gift to a trust that was still within seven years at their death), only 50% of the NRB transfers. The survivor gets their own full NRB plus 50% of the first spouse's NRB = 150% × £325,000 = £487,500.

03

The residence nil rate band — conditions, calculation and the taper

The RNRB of £175,000 per individual is an additional IHT allowance available when a qualifying residential property (QRP) is inherited by direct descendants. A QRP is a property that was the deceased's residence at some point — it does not need to be the residence at death. Direct descendants include children, stepchildren, adopted children, foster children and the remote issue of any of these (grandchildren, great-grandchildren), plus their spouses and civil partners.

The RNRB is limited to the lower of £175,000 or the net value of the QRP inherited by direct descendants. If the family home is worth £120,000 net of any mortgage, the RNRB is limited to £120,000 — not the full £175,000. The unused portion of the RNRB (£55,000 in this case) cannot be transferred or used elsewhere.

Downsizing provisions: if the deceased sold a property that would have qualified for the RNRB on or after 8 July 2015, and the sale proceeds (or assets acquired with them) are left to direct descendants, a downsizing addition applies — effectively allowing the RNRB to be claimed even though the property has been sold. This provision prevents the RNRB from penalising those who downsized for genuine reasons — such as moving into care.

The taper: the RNRB is withdrawn at £1 for every £2 of net estate above £2 million. At £2,175,000 net estate, the RNRB is zero. For a couple with a combined estate of £2.35 million, both RNRBs are zero — the combined IHT-free threshold is £650,000 (both NRBs) not £1,000,000. The taper applies to each estate individually on death — the combined estate is not relevant, only the individual estate at the time of each death.

04

Will structuring to preserve both NRBs and both RNRBs

The interaction between the NRB, RNRB, spousal exemption and transferable allowances creates will drafting complexity that frequently catches families unaware. The following scenarios illustrate the most common mistakes and their cost.

Mistake 1 — leaving assets directly to children on first death. A married couple where the first spouse leaves their entire estate to the children (rather than the survivor) uses the NRB on first death — but the NRB used on first death cannot transfer to the survivor. For an estate of £350,000 on first death: the NRB covers £325,000, the excess £25,000 is taxed at 40% (£10,000 IHT). No NRB transfers to the survivor. Compare: leaving the full £350,000 to the survivor (using the spousal exemption) preserves the entire NRB for transfer — saving the £10,000 IHT on first death and giving the survivor £650,000 of NRB plus the full RNRB on second death.

Mistake 2 — trust provisions that inadvertently claim the NRB on first death. Wills drafted before 2008 frequently included 'nil rate band discretionary trust' provisions — designed to use the NRB on first death to prevent it being wasted. Since the TNRB was introduced in 2008, these provisions are frequently unnecessary and should be reviewed. A 2006 will that creates a £325,000 discretionary trust on first death claims the NRB on first death and prevents it transferring to the survivor — potentially costing £130,000 in IHT on second death that could have been avoided.

Mistake 3 — leaving the home to a trust rather than directly to direct descendants. The RNRB requires the property to pass directly to direct descendants (or to a trust with immediate post-death interest for the benefit of direct descendants). A discretionary trust that includes the property in its assets does not qualify for the RNRB — losing up to £70,000 of IHT saving per person (£175,000 RNRB × 40%). This is a very common drafting error in wills prepared without specialist IHT advice.

05

Practical steps to claim the full £1 million threshold

The £1 million combined IHT threshold for a married couple requires four specific conditions to be met simultaneously: (1) the first spouse's NRB is fully preserved and transferred — meaning on first death, the full NRB was not used by lifetime gifts or will provisions; (2) the survivor's NRB is similarly preserved — no CLTs within seven years of second death that erode the NRB; (3) a qualifying residential property passes to direct descendants from the surviving spouse's estate; and (4) the surviving spouse's net estate does not exceed £2 million (above which the RNRB tapers to zero).

The practical steps to ensure all four conditions are met: review the current wills with a specialist solicitor to confirm no NRB is claimed on first death; confirm that any historic lifetime gifts (CLTs to trusts) are mapped against the NRB with sufficient seven-year clearance; confirm the family home will be available to pass to children on second death (the RNRB requires this to be at least partly the case); and monitor the combined estate value annually — if it approaches £2 million, estate reduction strategies (gifting, pension contributions) are needed to preserve the RNRB.

For the many couples who have historic nil rate band trust provisions in pre-2008 wills: the trust provisions can be dis-applied by the trustees after death under a deed of appointment, or the survivor can redirect inherited assets via a deed of variation within two years of first death. Both options require specialist legal advice but can recover the full TNRB for the survivor at relatively low cost.