IHT Nil Rate Bands: How to Maximise Your Inheritance Tax Exemptions

Inheritance tax (IHT) at 40% is one of the most significant wealth transfer taxes for UK-connected families. Yet the government provides two important tax-free bands — the nil rate band (NRB) and the residence nil rate band (RNRB) — which, when used efficiently, can protect a substantial amount of wealth from the charge. Understanding how these bands work, their limitations, and how to maximise their use is an essential part of any estate plan.

The Nil Rate Band

The nil rate band is the threshold below which no inheritance tax is payable. For 2026, the NRB is £325,000 per individual. This figure has been frozen since 2009 and is due to remain frozen until at least April 2031.

Assets within the NRB pass free of IHT. Assets above it — whether on death or in respect of chargeable lifetime transfers made within seven years of death — are taxed at 40%. The effective rate is therefore:

• 0% on the first £325,000 of the taxable estate.
• 40% above £325,000 (or 36% if at least 10% of the estate is left to charity).

The freeze of the NRB at £325,000 has a compounding "fiscal drag" effect. As house prices and investment values rise, an increasing number of estates are being pulled into the IHT net even though the nominal tax-free threshold has not changed. HMRC data as of 2026 shows IHT receipts increasing year-on-year as a result of this drag.

The Residence Nil Rate Band

Introduced in 2017 and fully phased in by 2020, the residence nil rate band (RNRB) provides an additional IHT-free allowance on death. For 2026, the RNRB is £175,000 per individual. Like the NRB, it is frozen until at least April 2031.

The RNRB applies where:

1. The deceased owned (or had previously owned) a residential property that they occupied as their home at some point (the "qualifying residential interest").
2. That property, or the proceeds of its sale (if "downsizing" provisions apply), are left to "direct descendants" — broadly, children, grandchildren, stepchildren, adopted children, and foster children.

The RNRB does NOT apply to gifts to:

• Siblings.
• Nieces and nephews.
• Non-related beneficiaries.
• Discretionary trusts (unless the beneficiaries are all direct descendants — even then, there is complexity).

This is a commonly misunderstood restriction. An individual who leaves their home to a niece does not benefit from the RNRB.

The Taper for Larger Estates

The RNRB is tapered away for larger estates. The RNRB reduces by £1 for every £2 by which the net estate value exceeds £2 million.

The implications are significant:

• An individual with a net estate of £2.175 million has their RNRB reduced to £87,500 (half the full amount).
• An individual with a net estate of £2.35 million has their RNRB entirely tapered away.
• A married couple with a combined estate of £2.7 million, if each spouse's estate on second death is £2.35 million, loses both RNRBs entirely.

For high-net-worth families, the RNRB may therefore provide little or no benefit — particularly given rising property values and the frozen taper threshold of £2 million.

The estate value for taper purposes is the "net qualifying value" — broadly, the gross value of the estate minus debts (including mortgage liabilities). If you have a mortgage on your main residence or other debts, these reduce the estate value for taper purposes and may preserve some or all of the RNRB.

The Downsizing Provisions

The RNRB includes a "downsizing addition" for those who sell or reduce the value of their qualifying residential property. If you sell your home and move to a smaller property, or into a care home, and would otherwise have lost the RNRB as a result, the downsizing provisions can preserve the allowance.

The mechanics are complex: a "lost RNRB" amount is calculated, and this can be brought forward and used against the estate, provided the estate includes other assets that pass to direct descendants. Taking specialist advice where downsizing is anticipated is important.

Transferable Nil Rate Band

One of the most valuable features of the NRB and RNRB is transferability between spouses and civil partners.

Transfers on first death. When the first spouse dies, any unused NRB and/or RNRB can be transferred to the surviving spouse's estate. The transfer is expressed as a percentage of the band (not a fixed sum), so if the NRB increases in the future, the transferred proportion is based on the increased amount.

Maximum combined allowances. A couple who have each preserved their full NRB and RNRB on the death of the second spouse can have:

• Combined NRB: £325,000 × 2 = £650,000.
• Combined RNRB: £175,000 × 2 = £350,000.
• Combined total threshold: £1,000,000.

This is the "£1 million IHT-free" figure that is frequently cited. However, it is important to understand that it requires:

• The qualifying residential property to be left to direct descendants.
• The estate to be below £2 million (otherwise the RNRB is tapered).
• The first spouse to have made no chargeable transfers (or to have preserved the NRB).

How to claim. The transfer of unused NRB and RNRB is not automatic — a claim must be made by the executors on the death of the second spouse, using HMRC form IHT402. Supporting evidence of the first death is required. Failure to make the claim means the benefit is lost. Executors and beneficiaries should not assume that HMRC applies the transfer automatically.

NRB and Gifts

The NRB is used up by:

1. Chargeable lifetime transfers (CLTs) made within seven years before death — broadly, gifts to trusts.
2. Potentially exempt transfers (PETs) — gifts to individuals — that become chargeable because the donor dies within seven years.

Each PET or CLT chips away at the NRB available on death. If you made large gifts in the seven years before death, the remaining NRB on death will be reduced or eliminated.

The NRB is not enlarged by unused amounts from earlier marriages or civil partnerships — the transferred NRB only applies to the last surviving partner's estate. However, if the first spouse made no chargeable transfers in the seven years before their death and used none of their NRB, the full NRB transfers to the survivor.

Careful gift planning — using annual exemptions, normal expenditure out of income, and phased PETs — can preserve the NRB for use on death while making effective lifetime gifts.

Planning Around the NRBs

For estates above the combined £1 million threshold, or where the RNRB is tapered away, additional IHT planning is needed. Common approaches include:

• Lifetime gifting using the seven-year potentially exempt transfer rules.
• Trusts for gifts that are removed from the estate at the point of transfer (subject to the entry charge and periodic charges).
• Business Property Relief (for qualifying business assets, AIM shares, and certain unlisted investments). From 6 April 2026, 100% BPR (and APR combined) is capped at £2.5 million of qualifying assets per estate (raised from the £1 million originally announced in the October 2024 Budget, increased to £2.5 million in December 2025, and transferable between spouses/civil partners); assets above that threshold receive only 50% relief (a 20% effective IHT rate). Note that AIM and other unlisted shares receive 50% relief only and do not use the £2.5 million allowance. Careful review of BPR-qualifying holdings is now essential for larger estates.
• Pension contributions (pensions remain outside the estate until April 2027, when new rules bring defined contribution pensions within IHT scope — take specialist advice on the transitional rules).
• Whole-of-life insurance written in trust, to provide a lump sum to meet the IHT bill on death without requiring estate assets to be sold.
• Agricultural Property Relief for qualifying farmland.

Important Considerations

Inheritance tax law is complex and frequently changes. This article reflects the position as at June 2026 and is intended as a general guide only. Nothing in this article constitutes tax or financial advice. The nil rate band, residence nil rate band, and their transferability rules depend on the specific facts of your estate, your family structure, your property holdings, and your history of gifts and trusts. Always seek qualified independent advice from a tax specialist before making estate planning decisions. Investments and property values can fall as well as rise.

How Global Investments Can Help

Global Investments works with high-net-worth clients and their families to review and optimise their IHT position, covering nil rate band planning, gifting strategies, Business Property Relief, pension planning, and trust structures. We take a holistic view of the estate — coordinating investments, property, trusts, and insurance — to ensure the NRBs are used effectively as part of a coherent succession plan. Contact our team to arrange a private consultation.