Increase the IHT-free part of your estate by 50%

Nil rate band

When an individual dies part of their estate is free from inheritance tax (IHT). This is called the nil rate band (NRB). It’s been set at £325,000 since 2009 and will remain so until at least 2030. Because the NRB hasn’t kept up with inflation, more estates are being dragged into the IHT net. Naturally, therefore, any additional IHT exemption, relief or nil rate amount that can be claimed is welcome.

Property-related NRB

In addition to the NRB an estate may be entitled to an additional nil rate band (known as the residence nil rate band (RNRB)) if it includes a property that the deceased used as their home, or value derived from the sale of their home. But for the purposes of this article we’re concentrating on the basic NRB and especially the little-known rule that entitles a couple’s estates to three NRBs instead of just two.

Spouses and the transferable NRB

Before we get into when and how an extra NRB can be obtained, we need a brief look at the IHT ground rules. (1) Any part of your estate that passes to your spouse or civil partner is an exempt transfer for IHT purposes and so doesn’t use any NRB. (2) If your estate doesn’t use all its NRB, the unused fraction can be transferred and used by your spouse or civil partner’s estate when they die. (3) An estate can only use a maximum of two NRBs.

Example. William died in 2006, leaving his entire estate to his wife Linda. This is an IHT-exempt transfer and so none of William’s NRB was used. In 2019 Linda married Harry. He died in 2024. In his will he left £325,000 of his estate to Linda’s daughter to use the NRB. His remaining estate went to Linda, which was an exempt transfer. Consequently, no IHT was payable on Harry’s estate. The position would have been the same had Harry left the £325,000 to anyone else apart from Linda.

An estate is entitled to the unused NRB of the deceased’s former spouse as long as the couple were married or in a civil partnership at the time the first of them died. Unused NRB is not transferred automatically. A claim has to be made using Form IHT402 .

Accessing the extra NRB

To maximise tax efficiency it was important that Harry’s estate made a transfer liable to IHT, i.e. the £325,000 inheritance for Linda’s daughter. Had he left all his estate to Linda, his estate’s NRB would have gone to waste because she (or rather her estate) was already entitled to the maximum two NRBs: hers and William’s.

Understanding the three rules we explained earlier is essential. Linda and Harry were alert to the opportunity to claim an extra NRB and reduce their combined estates’ IHT bill by £130,000 (£325,000 x 40%). They achieved this simply by including a bequest to someone other than their spouse in their wills meaning that all or part their estates’ NRB was used.