What Is the Nil-Rate Band?

The basic threshold

The nil-rate band (NRB) is the amount an estate can be worth before inheritance tax kicks in. The current figure is £325,000. Estates below this pay nothing. Estates above it pay 40% on everything over the threshold.

So if your estate is worth £450,000, the taxable amount is £125,000 and the tax bill is £50,000.

The nil-rate band has been frozen at £325,000 since 2009. It is set to remain at that level until at least 2030. Because house prices have risen substantially in the same period, far more estates are now caught by inheritance tax than when the threshold was introduced.

Transferring the nil-rate band between spouses

When a spouse or civil partner dies and leaves everything to the surviving spouse, their estate is exempt from inheritance tax regardless of size. But their nil-rate band is not wasted — it transfers to the survivor.

When the second spouse dies, their estate benefits from two nil-rate bands: their own £325,000 plus the unused proportion of the first spouse's. If the first spouse used none of their NRB, the combined threshold is £650,000.

This only applies to married couples and civil partners. Unmarried partners cannot transfer their nil-rate band.

The residence nil-rate band

Since 2017, there has been an additional allowance called the residence nil-rate band (RNRB). It is currently £175,000. It applies when you leave a residential property you lived in to a direct descendant — a child, stepchild, or grandchild.

For a homeowner leaving property to their children, the RNRB takes the effective threshold to £500,000 (£325,000 + £175,000).

Like the standard nil-rate band, the RNRB is also transferable between spouses. A couple can potentially pass on up to £1 million to their children tax-free, combining two standard nil-rate bands (£650,000) and two residence nil-rate bands (£350,000).

The RNRB is reduced for large estates. It tapers by £1 for every £2 the estate is worth above £2 million, so very high-value estates lose the benefit entirely.

What happens if your estate is above the threshold

The 40% rate applies only to the amount above the nil-rate band. Charitable gifts are exempt and reduce the taxable estate. If you leave at least 10% of your net estate to charity, the rate on the remainder drops to 36%.

Some assets are not counted in the estate for IHT purposes. Life insurance held in trust, qualifying business assets, and agricultural property may benefit from reliefs that reduce or eliminate the tax due.

What your will can do

Your will determines how your estate is distributed, which directly affects how the nil-rate band is used. Leaving assets to a spouse uses the spousal exemption but preserves the NRB for the next generation. Leaving assets directly to children uses the NRB immediately. Which is better depends on your estate's size and structure.

For most straightforward estates, a solicitor is not needed to manage inheritance tax. For estates where tax is a genuine concern, specialist advice pays for itself.