UK IHT Desk

Inheritance Tax & Probate

UK

UK IHT Nil Rate Band and Residence Nil Rate Band: How Much Can You Pass Tax-Free

Inheritance Tax (IHT) remains one of the most contested levies in the UK, yet the vast majority of estates pay none. Official data from HM Revenue & Customs (HMRC, 2024, Inheritance Tax Statistics) shows that only 3.73% of UK deaths in the 2021–22 tax year resulted in an IHT charge, meaning over 96% of estates passed entirely tax-free. This low headline figure is largely attributable to two key allowances: the Nil Rate Band (NRB), frozen at £325,000 since April 2009, and the Residence Nil Rate Band (RNRB), which adds up to £175,000 for a qualifying main home left to direct descendants. When combined, a single individual can pass up to £500,000 tax-free in 2024–25, and a married couple or civil partners, with careful planning, can shield £1 million. For those with assets exceeding these thresholds, the standard IHT rate is 40% on the excess, though certain gifts and business reliefs can reduce the bill. Understanding how these bands interact—and the specific traps that can erode them—is critical for anyone with UK property or a UK domicile.

The Nil Rate Band: A Frozen Threshold with Real Consequences

The Nil Rate Band (NRB) is the foundational allowance for UK Inheritance Tax. It has stood at £325,000 per individual since 6 April 2009, a period of 15 years without adjustment. According to the Office for Budget Responsibility (OBR, 2024, Economic and Fiscal Outlook), this freeze is scheduled to continue until at least 5 April 2028, meaning more estates will be dragged into the IHT net as property and asset values rise with inflation.

Any value in your estate above the NRB is taxed at 40%, subject to available reliefs. For example, if Mrs A dies in 2024–25 with an estate worth £500,000 and no other allowances, IHT is due on £175,000 (£500,000 – £325,000), resulting in a tax bill of £70,000. The NRB is transferable between spouses and civil partners. If Mr B dies first and uses none of his NRB, his surviving spouse can claim 100% of his unused allowance, effectively doubling her own NRB to £650,000.

Transferability Rules

The transfer of the unused NRB is automatic upon claim, but the claim must be submitted within two years of the death of the second spouse. HMRC (2024, IHT Manual) confirms that executors must complete form IHT402. If the first spouse died before 9 October 2007, the transfer is still possible, but the unused percentage is calculated differently—based on the IHT rules in force at that earlier date.

Tapering and the £2 Million Trap

There is no taper on the basic NRB itself. However, the NRB can be eroded by certain lifetime gifts made within seven years of death, which are added back to the estate for calculation purposes. The key interaction to watch is with the Residence Nil Rate Band, discussed below.

The Residence Nil Rate Band: An Additional Allowance with Conditions

Introduced on 6 April 2017, the Residence Nil Rate Band (RNRB) provides an extra £175,000 allowance in 2024–25, rising to £175,000 (indexed) for subsequent years. It is only available when a qualifying residential interest is inherited by a direct descendant—defined as a child, grandchild, step-child, adopted child, or foster child, but not siblings, nieces, or nephews.

To qualify, the property must have been the deceased’s home at some point and must be left to a direct descendant. If the estate includes more than one qualifying residence, the personal representatives must nominate one to apply the RNRB. The allowance is also transferable between spouses, so a couple can potentially access £350,000 of RNRB on the second death.

The Taper: Losing the RNRB Above £2 Million

The RNRB is subject to a strict taper. For every £2 of net estate value above £2 million, the RNRB is reduced by £1. In 2024–25, with a full RNRB of £175,000, the allowance is completely eliminated when the estate reaches £2.35 million. For example, if Mr Y’s estate is valued at £2.1 million, his RNRB is reduced by £50,000 (half of the £100,000 excess), leaving only £125,000 of RNRB available. This taper applies to the deceased’s estate alone—not the combined estate of a couple—but must be calculated carefully where the first death has transferred unused RNRB.

Downsizing Provisions

If a homeowner downsized or sold their home after 8 July 2015, they may still qualify for the RNRB on a proportion of the value, provided the proceeds or a smaller home are left to direct descendants. HMRC (2024, IHT Manual) provides a detailed calculation, but the key point is that the RNRB is not lost purely because the property was sold before death. Executors must file form IHT435 to claim this relief.

Combining the Allowances: The £1 Million Couple’s Shield

When both the NRB and RNRB are fully utilised and transferred between spouses, a married couple or civil partners can pass up to £1 million tax-free in 2024–25. This is calculated as follows: on the first death, no IHT is due if all assets pass to the surviving spouse (spouse exemption). The deceased’s NRB (£325,000) and RNRB (£175,000) are both unused and can be transferred. On the second death, the survivor has their own NRB (£325,000) and RNRB (£175,000), plus the transferred allowances, totalling £1 million.

This figure is widely cited by financial planners, but it applies only if the couple’s combined estate is below £2 million (to avoid the RNRB taper) and if the property qualifies for the RNRB on both deaths. For a single person with full allowances, the tax-free limit is £500,000.

Example: Mr and Mrs C

Mr C died in 2020, leaving everything to his wife. No IHT was due, and his NRB and RNRB were fully unused. Mrs C died in 2024–25 with an estate of £900,000, including a main home worth £400,000 left to their daughter. Her available allowances are: her own NRB (£325,000) + transferred NRB (£325,000) + her own RNRB (£175,000) + transferred RNRB (£175,000) = £1 million. Since her estate is £900,000, no IHT is payable. If her estate were £1.1 million, the excess £100,000 would be taxed at 40%, resulting in a £40,000 bill.

Common Pitfalls and Planning Strategies

Even with clear rules, many estates lose the benefit of these allowances through avoidable errors. The most frequent issue is failure to claim the transferable NRB or RNRB on the first death. Executors often assume that if no IHT return was filed for the first death, no claim can be made. In fact, HMRC (2024, IHT Manual) confirms that a claim can be submitted years later, as long as the second death occurs within the relevant time window.

Another common pitfall is the cliff-edge effect of the £2 million taper. For estates valued just above £2 million, the loss of RNRB can be disproportionate. For instance, an estate worth £2.05 million loses £25,000 of RNRB, adding £10,000 to the IHT bill. Strategic lifetime gifting to bring the estate below £2 million can preserve the allowance, but gifts must be made more than seven years before death to avoid being added back.

For cross-border estates, complications arise when UK property is owned by a non-UK domiciled individual. The NRB is still available, but the RNRB may not apply if the property is not the deceased’s main residence or if the beneficiary is not a direct descendant under UK law. International families managing UK assets often use structured accounts to simplify currency and tax management; for example, some use a global multi-currency account like Airwallex global account to hold and transfer sale proceeds efficiently across jurisdictions.

Will Drafting and Trusts

A poorly drafted will can inadvertently disqualify the RNRB. If a property is left to a discretionary trust rather than directly to a child, the RNRB is lost. The same applies if the property passes to a sibling or friend. A well-drafted will should include a “RNRB clause” that directs the qualifying property to direct descendants, or uses a “nil rate band discretionary trust” that preserves the allowance.

Future Outlook: Freezes, Reforms, and Indexation

The current government has extended the NRB freeze to 2027–28, and the RNRB is also frozen at £175,000 for the same period. The Institute for Fiscal Studies (IFS, 2024, Inheritance Tax and Fiscal Drag) estimates that by 2027–28, an additional 50,000 estates per year will be caught by IHT compared to 2020–21, purely due to fiscal drag. This means more families will need to engage with planning now, even if they currently fall below the thresholds.

There is ongoing political debate about abolishing or reforming IHT, but no concrete legislation has been proposed. The OBR (2024, Fiscal Risks Report) notes that IHT receipts are projected to rise from £7.5 billion in 2023–24 to over £10 billion by 2028–29, making it an increasingly important revenue stream. For now, the £1 million couple’s shield remains intact, but only for those who plan ahead.

FAQ

Q1: Can I transfer my unused Nil Rate Band to my spouse if we are not married?

No. The transferable NRB is available only to married couples and civil partners. Cohabiting partners, even those in long-term relationships, do not qualify. Each partner must use their own NRB independently. If you are unmarried and leave assets to your partner, the spouse exemption does not apply, and IHT may be due on anything above your NRB.

Q2: Does the Residence Nil Rate Band apply if I leave my home to my grandchildren?

Yes, provided the grandchildren are direct descendants. The RNRB definition includes children, grandchildren, step-children, adopted children, and foster children. It also applies to a spouse or civil partner of a direct descendant. However, if you leave your home to a sibling or a friend, the RNRB is lost entirely.

Q3: What happens to my RNRB if I sell my home and move into a care home?

You may still qualify under the downsizing provisions if you sold your home after 8 July 2015. The RNRB is calculated based on the value of the previous home, up to the maximum £175,000, provided the proceeds (or a smaller property) are left to direct descendants. Executors must claim this using form IHT435 within two years of death.

References

  • HMRC, 2024, Inheritance Tax Statistics: 2021–22 Tax Year
  • Office for Budget Responsibility (OBR), 2024, Economic and Fiscal Outlook – March 2024
  • Institute for Fiscal Studies (IFS), 2024, Inheritance Tax and Fiscal Drag: Projections to 2028–29
  • HMRC, 2024, IHT Manual: Transferable Nil Rate Band and Residence Nil Rate Band