When someone dies, one of the first questions executors face is whether inheritance tax (IHT) is due. The nil rate band is central to that calculation. Understanding how it works, and how the transferable nil rate band applies in certain estates, can make a significant difference to the tax the estate pays.
This guide explains both in plain terms.
What is the nil rate band?
The nil rate band is the amount of a person’s estate that is free from inheritance tax. In simple terms, it is a threshold. Everything up to that threshold is taxed at zero per cent. Everything above it is taxed at 40 per cent.
The current nil rate band is £325,000. This threshold has been frozen at that level since 2009 and is set to remain frozen until at least 2030.
So, if someone dies with an estate worth £400,000, the first £325,000 is tax-free. The remaining £75,000 is taxed at 40 per cent, producing an IHT bill of £30,000.
How does the nil rate band apply in practice?
As executor, you calculate the total value of the estate first. This includes property, savings, investments, and most other assets. You then deduct any liabilities and reliefs, such as charitable legacies.
If the net estate exceeds £325,000, inheritance tax is likely due on the excess. However, other reliefs may reduce that figure further.
One of the most significant is the residence nil rate band. This is an additional allowance of up to £175,000, available where the deceased leaves a family home to direct descendants such as children or grandchildren. It can stack on top of the standard nil rate band and, in some estates, makes a substantial difference to the final IHT bill. We cover how the residence nil rate band works in full in our dedicated guide.
Probate and inheritance tax are closely connected. You generally need to calculate any IHT due before the probate registry will grant you the authority to administer the estate.
What is the transferable nil rate band?
The transferable nil rate band is an additional allowance available to the surviving spouse or civil partner of someone who has died. It allows the unused portion of the first spouse’s nil rate band to be transferred to the second spouse’s estate.
This rule applies regardless of when the first spouse died, provided the couple were married or in a civil partnership at the time.
How the transfer works
When the first spouse dies, their estate may not have used all of their nil rate band. This happens most commonly when assets pass directly to the surviving spouse, because transfers between spouses are exempt from inheritance tax entirely.
As a result, the first spouse’s nil rate band goes unused. When the second spouse later dies, their executors can claim that unused allowance. This can effectively double the nil rate band available to the second estate, up to £650,000.
The transferable nil rate band is claimed as a percentage of the nil rate band in force at the time of the first spouse’s death. If the first spouse used none of their allowance, 100 per cent transfers. If they used half, 50 per cent transfers.
A practical example
A husband dies in 2010, leaving everything to his wife. His estate uses none of his nil rate band. When his wife later dies, her executors can claim a 100 per cent transfer, giving her estate a total nil rate band of £650,000.
If the residence nil rate band also applies, the total tax-free threshold can reach £1 million in some cases. This is exactly the kind of calculation that matters when executors need to think carefully about inheritance tax when a second parent dies.
What evidence do you need to claim the transfer?
HMRC requires evidence of the first spouse’s death and their tax position at that time. Executors typically need to provide:
- The first spouse’s death certificate
- Details of their estate at the time of death
- Evidence that a nil rate band was unused or only partly used
- The original grant of probate or letters of administration, if one was obtained
HMRC‘s inheritance tax form IHT402 is used to claim the transferable nil rate band. You submit this alongside the main IHT400 form when reporting the estate.
Common points of confusion
Can unmarried couples use the transferable nil rate band?
No. The transferable nil rate band applies only to spouses and civil partners. Cohabiting partners, however long they have lived together, cannot transfer unused allowances between their estates.
What if the first spouse died a long time ago?
The rules apply regardless of the date of the first death. However, gathering evidence from a death many decades ago can be difficult. Therefore, executors should search for old probate records, wills, and estate accounts wherever possible.
Does the transfer happen automatically?
No. Executors must actively claim it. HMRC does not apply the transfer without a claim. This is one reason why taking professional advice early in the process matters.
The importance of getting the calculation right
Inheritance tax can become complex quickly. The interaction between the nil rate band, the transferable nil rate band, the residence nil rate band, and other reliefs requires careful calculation. An error can result in overpaying tax or, worse, underpaying and facing a penalty from HMRC.
In addition, some estates involve trusts, business assets, or agricultural property. Each of these brings its own rules and reliefs into play. An executor is personally responsible for the accuracy of the IHT return they submit. That responsibility is significant.
If you are unsure about any aspect of inheritance tax in the estate you are administering, professional advice is the practical and prudent course of action. A solicitor with experience in estate administration can review the estate, identify every available relief, and ensure that the IHT return is accurate. Errors are far easier to avoid at the outset than to correct later.
Where to go from here
If you are an executor dealing with an estate that may involve the nil rate band or a transferable nil rate band claim, speaking to a qualified professional is the right first step.
You can book a free legal consultation through The Probate Network and speak with an SRA-regulated solicitor who specialises in estate administration and inheritance tax.
This article is for general guidance only and does not constitute legal or tax advice. Rules and thresholds can change and every estate is different. For advice on your own circumstances, speak to a qualified professional. You can book a free legal consultation through The Probate Network.
