Inheritance Tax Nil-Rate Band and Residence Nil-Rate Band Explained

Inheritance tax (IHT) is charged at 40% on the value of a person's estate above their available allowances. Understanding those allowances, and how to maximise them, is one of the most important tasks for anyone involved in estate administration. The two main allowances are the nil-rate band and the residence nil-rate band. Both can be transferred between spouses, potentially sheltering up to £1,000,000 from IHT for a married couple or civil partnership.

The nil-rate band

Every person has a nil-rate band (NRB): the threshold below which no IHT is charged. For the 2026/27 tax year, the NRB is £325,000. The estate pays IHT at 40% on every pound above this figure.

The NRB has been frozen at £325,000 since 2009. Under current government policy, this freeze continues until at least April 2030. Because property values and savings balances have risen significantly over this period, a growing number of estates that would once have been comfortably below the threshold are now liable for IHT.

If 10% or more of the net estate passes to registered charities, the IHT rate on the taxable remainder reduces from 40% to 36%. This reduced rate applies to the whole taxable portion, not just to the amount above the charitable gift.

The residence nil-rate band

The residence nil-rate band (RNRB) is an additional allowance, introduced in 2017, that applies when a residential property passes to direct descendants. The RNRB is currently £175,000 per person.

To qualify for the RNRB:

• The deceased must have owned a residential property (or have previously owned one that was downsized or sold after 8 July 2015)
• The property must pass to direct descendants: children, grandchildren, step-children, adopted children, or foster children
• The RNRB can only shelter property up to its value: if the property is worth less than £175,000, the RNRB is limited to the property value

The RNRB does not apply if the property passes to siblings, nieces, nephews, or friends, or if it passes outright to a discretionary trust (subject to some exceptions for trusts for the disabled or bereaved minors).

Tapering for larger estates

The RNRB tapers away for estates with a net value above £2,000,000. For every £2 by which the estate exceeds £2,000,000, the RNRB is reduced by £1. An estate worth £2,350,000 or more receives no RNRB at all.

The tapering is based on the net estate before reliefs such as business property relief or agricultural property relief. It is not affected by the standard NRB.

The NRB is not tapered: it is available in full regardless of estate size, though it may be eroded by gifts made in the seven years before death (explained below).

Transferring unused allowances between spouses

When one spouse or civil partner dies, any unused proportion of their NRB and RNRB can be transferred to the surviving spouse. This is one of the most important and widely used IHT planning tools.

The transfer works as a percentage, not a fixed pound amount. If the first spouse used none of their NRB (for example, because everything passed to the surviving spouse and qualified for the spouse exemption), 100% of the NRB transfers. The surviving spouse then has 100% of their own NRB plus the 100% transferred, giving them a combined NRB of £650,000 at current rates.

The same logic applies to the RNRB. A surviving spouse can hold up to two full RNRBs if the first spouse did not use theirs.

The transferable NRB is claimed on the second death by completing form IHT402 as part of the IHT400 return, or by including the evidence with the excepted estate declaration. Evidence of the first death and the IHT position at that time is needed.

Combined allowances: what is available in different scenarios

How gifts reduce the nil-rate band

The NRB is not static: gifts made during the deceased's lifetime can reduce the NRB available on death. The relevant gifts are:

• Potentially exempt transfers (PETs): outright gifts to individuals. If the donor survives seven years, the PET falls out of the estate and does not reduce the NRB. If the donor dies within seven years, the gift is added back to the estate and reduces the NRB pound for pound.
• Chargeable lifetime transfers (CLTs): gifts into certain trusts (such as discretionary trusts) are chargeable at the time they are made and immediately reduce the NRB available at death.

As executor, you must account for all gifts made in the seven years before death when preparing the IHT return. Review the deceased's bank statements, ask family members, and check any gift registers or records held by the deceased's financial adviser.

Business Property Relief and Agricultural Property Relief

Beyond the NRB and RNRB, two major additional reliefs can shelter significant assets from IHT:

• Business Property Relief (BPR): applies to qualifying business interests, shares in unlisted companies, and certain AIM-listed shares held for at least two years. Relief is 100% for most qualifying assets, meaning the value is wholly excluded from the IHT calculation. Shares in qualifying companies listed on the Alternative Investment Market (AIM) can qualify, though not all AIM shares do.
• Agricultural Property Relief (APR): applies to agricultural land and property used for agricultural purposes. Relief is 100% for owner-occupied farmland and 50% for tenanted agricultural land in most cases.

Both BPR and APR are subject to qualification conditions. The government announced in the October 2024 Budget proposals to cap the 100% rate of BPR and APR at £1,000,000 per person (combined), with amounts above that threshold qualifying for 50% relief only. Subject to legislation, these changes are expected to take effect from April 2026. Executors dealing with farming or business interests should take specialist advice on the current position.

What counts as the net estate for IHT

IHT is charged on the net estate: all assets at their open market value on the date of death, minus debts and liabilities. Debts include mortgages, credit card balances, personal loans, and reasonable funeral expenses. The net estate also includes:

• Assets held as tenants in common (the deceased's share)
• Life insurance proceeds not written in trust
• Assets in which the deceased retained an interest (such as a gift of a property where the donor continued to live rent-free)
• Gifts in the seven years before death (PETs and CLTs that fall back into the estate)

Assets that do not form part of the estate for IHT include jointly owned property passing by survivorship (joint tenancy) and life insurance or pension death benefits written in trust, though HMRC must still be informed of their existence in some circumstances.

Proposed changes from April 2027

The October 2024 Budget announced two further significant changes planned to take effect from April 2027. First, pension funds inherited on death are proposed to be included within the IHT estate. Currently most defined contribution pensions sit outside the estate. Second, the capping of BPR and APR at £1,000,000 combined is scheduled for April 2026. Both measures were subject to consultation and legislation at the time of writing. Executors dealing with estates that include substantial pension funds or agricultural/business assets should take specialist advice on the current legislative position before submitting an IHT return.

Practical steps for executors

• Value all assets at open market value on the date of death and deduct all liabilities to arrive at the net estate
• Check whether a transferable NRB and/or RNRB is available from a deceased spouse; collect the first spouse's death certificate and any records of IHT paid on the first estate
• Establish whether any residential property passes to direct descendants and whether the RNRB applies
• Review gifts made in the seven years before death and add back any that fall within the IHT period
• Check whether BPR, APR, or charitable gifts apply to reduce the taxable estate
• If the net estate (after reliefs) exceeds the available NRB, complete form IHT400 and pay IHT before applying for probate

Related guides

• Inheritance tax explained for executors
• IHT forms explained
• Life insurance and probate
• Deed of variation: redirecting an inheritance
• Joint tenants vs tenants in common