I outline the basic Inheritance Tax allowance (the nil rate band) and the newer Residence Nil Rate Band below, and update the guidance to reflect recent and upcoming changes in the rules.
Nil rate band
Inheritance Tax on your assets is charged at the following rates:
- 0% on the first £325,000 of your estate’s value (this portion is known as the nil rate band).
- 40% on the value above £325,000 (the taxable estate), with a reduced rate of 36% applying instead if at least 10% of your net estate is left to charity. You can use HMRC’s reduced rate calculator to see if an estate would qualify for the 36% rate.
The nil rate band is currently £325,000 and is frozen at this level until 5 April 2030. (It has remained at £325,000 since 2009 and, given the current fiscal climate, no increase is expected in the near term.)
Residence nil rate band
In addition to the standard nil rate band, there is an extra allowance called the Residence Nil Rate Band (RNRB) (introduced in 2017 by the Inheritance Tax Act 1984, sections 8D–8M). The RNRB is currently £175,000 per person and is also frozen at that level until April 2030. This allowance is rather complicated and subject to many conditions and exceptions.
Broadly speaking, an estate can claim the RNRB if:
- The deceased owned a home (or a share of one) that was at some point their residence; and
- That home (or assets of equivalent value, under downsizing provisions) is left to a direct lineal descendant (for example, a child or grandchild).
Where an estate is valued over £2 million, the Residence Nil Rate Band is tapered away by £1 for every £2 above the £2 million threshold. In other words, larger estates may gradually lose some or all of this home-related allowance. (Both the £175,000 RNRB and the £2 million taper threshold are also frozen until April 2030)
One of the best guides to the Residence Nil Rate Band allowance was produced by Charles Holbech and it spans an impressive 75 pages.
Transferrable allowances
If a couple are married or in a civil partnership, both of the above nil rate band allowances are transferable. This means that if the first spouse/partner to die does not use all of their £325,000 nil rate band (for instance, because everything is left to the surviving spouse and is therefore exempt), the unused portion can be passed on to the second spouse/partner’s estate. In effect the survivor’s estate can claim an increased nil rate band up to £650,000 (100% uplift) in that scenario. The Residence Nil Rate Band is similarly transferable: if the first death did not utilise the RNRB (or only used part of it), the unused percentage can be claimed by the estate of the second spouse on their death.
If any assets are left to your spouse or civil partner when you die, they are exempt from Inheritance Tax (often called the spouse exemption). Spouse-exempt transfers do not use up any of your own £325,000/£175,000 allowances. This is why it is common for the first spouse to die to leave everything to the survivor, so that the survivor can use both sets of allowances.
Example:
Alan and Sam are married and have one child, Alice. They own a house worth £750,000 and investments of £250,000 (total estate £1,000,000).
- When Alan dies first, he leaves everything to Sam. The entire transfer to Sam is spouse-exempt, so none of Alan’s £325k or £175k bands are used at that time.
- Later, Sam dies, leaving the entire £1,000,000 estate to their child Alice. Sam’s estate can claim:
- Sam’s own £325,000 nil rate band, plus
- Sam’s own £175,000 Residence Nil Rate Band, plus
- A 100% transferred uplift of both allowances, because Alan used 0% of his when he died (his estate was left entirely to Sam, so Alan’s unused bands transfer over).
Sam’s estate therefore benefits from a total of £1,000,000 in IHT-free allowances (£500k + £500k) and owes no Inheritance Tax. Alice inherits the full £1,000,000 estate without tax.
You will note that in the above example, Alan (the first to die) did not leave his share of the family home to a lineal descendant. This does not waste the Residence Nil Rate Band – Alan’s unused RNRB simply transferred to Sam’s estate and was used when Sam died. However, also note that if the estates were larger (above £2 million at first death), the amount of RNRB available to transfer would be reduced or wiped out by the tapering rule mentioned above.
Important: The generous transferability described above does not apply to certain other inheritance tax reliefs. Notably, the upcoming £1 million Business Property Relief/Agricultural Property Relief allowance (see Business and agricultural relief below) is not transferable between spouses or civil partners – each individual’s estate must qualify on its own.
One further planning point illustrated by the example is that, while leaving everything to your spouse is common (and maximises use of the nil rate bands), it is not always the ideal strategy for other reasons. If the surviving spouse inherits the entire estate outright and then later:
- Goes into long-term care,
- Falls into serious debt or bankruptcy, or
- Remarries,
then the inherited assets could be lost to care fees, creditors, or a new spouse/step-family. The children might ultimately never inherit those assets.
Fortunately, there are estate planning methods to protect a substantial part of the wealth in such scenarios without losing the benefit of the Residence Nil Rate Band. For example, spouses can use a Will trust (often a life interest trust or property trust) in their Wills. Instead of leaving everything outright to the survivor, the first-to-die’s share of the home can be left in a trust that gives the survivor a lifetime interest (right to live there or receive income). The survivor still benefits from the asset during their lifetime, but that portion of the estate is kept separate, ultimately for the children. This kind of arrangement can ring-fence part of the estate from care fees, remarriage claims, and so on, while still preserving the RNRB (the legislation treats a life-interest trust as inherited by the spouse for RNRB purposes).
Leaving money to minors
If children are still minors (under 18) when both parents have died, they cannot directly inherit property until reaching adulthood. However, if the inheritance is held in the right type of trust for them, the Residence Nil Rate Band can still apply. Qualifying trusts for minors (lineal descendants) include:
- an immediate post-death interest (Section 49 Inheritance Tax Act 1984)
- a disabled person’s interest (Section 89/89B Inheritance Tax Act 1984)
- bereaved minor’s or bereaved young person’s interests (Section 71A/71D Inheritance Tax Act 1984)
A bare trust (where the child becomes absolutely entitled at 18) would also qualify for RNRB, though many parents prefer one of the other trust types to delay full control beyond age 18. By contrast, assets held in a discretionary trust (even if all the beneficiaries are the deceased’s children or grandchildren) do not qualify for the RNRB. Similarly, a trust with wording like “to such of my children as reach 21” would not qualify, because the inheritance is not immediately vesting in a descendant.
If a Will does include a discretionary trust for the family home, there is a workaround: within 2 years of death, the trustees can appoint (i.e. appoint out or distribute) the property to a direct descendant, which is then read back into the Will. This post-death appointment (under Section 144 IHTA 1984) is treated as if the deceased had left the property to the child outright, therefore allowing the estate to claim the RNRB. (This must be done within two years of death.)
However, if the home is first given via a life-interest trust for the spouse and only goes into a discretionary trust on the second death, that strategy won’t work – because the children won’t inherit the property until the second death, by which time the 2-year window from the first death has usually long closed. For this reason, it is usually safer to avoid discretionary trusts involving the residence if the goal is to secure the RNRB. The life-interest trust approach described above is often a better solution.
Options for grandparents
The special trusts mentioned above are generally only available when leaving assets to your children. Grandparents who wish to leave property to minor grandchildren have a more limited set of choices. A grandparent can use:
- a bare trust,
- an Immediate Post-Death Interest trust (typically for a surviving spouse, so not usually applicable for grandchild beneficiaries in a Will), or
- a discretionary trust for the minors.
Each option has its own pros and cons, especially regarding tax. For example, a discretionary trust gives flexibility and can be optimal for Income Tax/Capital Gains Tax, but (as noted) it will not get the RNRB for IHT. A bare trust or life-interest for a minor might preserve RNRB but has other drawbacks (like the child becoming entitled at 18 in a bare trust). It’s important to weigh these considerations and, if substantial assets are involved, get specific advice.
You can find out more about trusts for minors here.
Downsizing allowance
If an elderly person downsizes to a smaller home, or even sells their home and moves into rented accommodation or care, their estate can still claim the full Residence Nil Rate Band that would have been available had they kept the original property until death. This is known as the downsizing addition. The downsizing rules were introduced to prevent people from feeling forced to hang on to an unsuitable large house just to secure the RNRB. In essence, if you dispose of your home (on or after 8 July 2015) and at least some of your estate is left to your direct descendants, the estate can claim an RNRB equivalent to the home you used to own, even though you don’t own it at death. The detailed calculation can be complex, but it ensures that seniors who downsize or gift their home are not worse off in terms of the RNRB entitlement.
Claiming the downsizing addition: The estate’s personal representatives must claim the downsizing RNRB using HMRC form IHT435, and this claim must be made within 2 years from the end of the month in which the death occursgov.uk. (HMRC does have discretion to extend this deadline in some circumstances.) The claim will require details of the disposed property and the assets passing to the descendants, so executors should retain relevant information when someone has downsized. Once claimed, the downsizing allowance effectively tops up the estate’s RNRB up to the amount that was “lost” by selling or reducing the value of the former home.
Business and agricultural relief: new £1m allowance (from 6 April 2026)
Finally, it’s worth highlighting major changes coming to Business Property Relief (BPR) and Agricultural Property Relief (APR), which are reliefs that can reduce the Inheritance Tax on certain business and farming assets. From 6 April 2026, these reliefs will shift to a capped allowance model. In short, each individual will have a £1 million allowance for 100% relief on business/farm assets, and value above that will only qualify for 50% relief. Here are the key points:
- 100% relief capped at £1m: The first £1,000,000 of combined qualifying business property and agricultural property in the estate will still be completely free of IHT (100% relief). Any value above £1 million will receive only 50% relief. In effect, excess business/farm assets become half-taxable. (Prior to this reform, there was no upper limit — 100% relief could apply to unlimited value.)
- Applies to lifetime gifts too: This £1m cap applies across all transfers of such property. It covers assets passed on death plus any relevant gifts made within 7 years before death. That includes potentially exempt transfers (PETs) to individuals that failed (donor died within 7 years) and chargeable lifetime transfers into trust. The £1m allowance is used up in chronological order (similar to how the nil rate band applies to lifetime gifts first). After the allowance is exhausted, any further qualifying assets are only 50% relieved.
- Not transferable between spouses: Unlike the nil rate band and RNRB, this new £1m BPR/APR allowance cannot be transferred or doubled up when one spouse dies unusedgov.uk. Each person gets their own £1m relief allowance. (So a married couple could potentially cover £1m of business/farm assets each with 100% relief, but one cannot inherit the other’s unused BPR/APR allowance.) The surviving spouse’s estate will still get their own £1m allowance for their business assets, in addition to any unused regular nil rate bands from the first death.
- AIM shares now only 50%: Currently, shares in unlisted companies (including those traded on the Alternative Investment Market) often qualify for 100% BPR. From April 2026, shares that are traded on a market but not listed on a recognised stock exchange (such as AIM stocks) will only qualify for 50% relief, not 100%. In other words, many AIM-based IHT portfolios will lose the full relief and be capped at 50%. (Shares in fully private companies remain eligible for 100% on the first £1m as described, and certain types of previously 50%-relievable assets, like controlling shareholdings in quoted companies, stay at 50% as before.)
- Trusts get their own allowance: For those using trusts, each relevant property trust will have its own £1m allowance for BPR/APR when calculating the 10-year anniversary charges and exit charges. This allowance refreshes every ten years per trust. However, new anti-fragmentation rules will prevent people from avoiding the cap by settling multiple trusts: if the same settlor creates several trusts (on or after 30 October 2024), those trusts will have to share one £1m allowance between them (allocated in date order) for the purpose of these reliefs.
- Fixed until 2030: The £1,000,000 relief cap is set to remain fixed until 5 April 2030 (matching the nil rate band freeze). From 6 April 2030 onwards, the legislation allows for the £1m figure to be index-linked to inflation (CPI) so it may increase over time. (Any increase would be by regulation, so it’s not automatic.)
- Anti-forestalling rule: To stop last-minute gifting, any lifetime gifts of business or farm assets made on or after 30 October 2024 will be subject to the new rules if the donor dies on or after 6 April 2026gov.uk. In practice, this means you cannot sidestep the cap by gifting at the eleventh hour unless you survive a full 7 years. Gifts made before 30 October 2024 are grandfathered under the old rules (they won’t count against the £1m if death is post-2026).
- Paying tax in instalments: Even with these reliefs, some large estates (especially farms) may face an IHT bill on the portion above £1m. The good news is that from April 2026, if Inheritance Tax is due on qualifying business or agricultural assets, the executor can opt to pay the tax in 10 equal annual instalments, interest-free. This should help avoid forced sales of family businesses or farms just to pay the tax. (Currently, IHT on certain assets like businesses can already be paid in instalments, but usually with interest. The new rule makes it interest-free for assets that qualify for BPR or APR relief.)
Additionally, from 6 April 2025, the scope of APR is being widened to support farmers who engage in environmental land schemes. Land that is managed under a qualifying environmental land management agreement (with the government or an approved body) will count as agricultural property for APR purposes. In other words, if a farmer has taken land out of traditional farming to, say, rewild or restore peatland under an official scheme, that land can still qualify for APR (where previously it might have lost the relief by ceasing to be used in agriculture). This change, effective for deaths and transfers from April 2025, removes a potential IHT barrier to agricultural landowners adopting long-term environmental projects.
IHT scope for international clients (residence-based rules from 2025)
For readers with international ties: there has been a fundamental change in how UK Inheritance Tax applies to those who are or were long-term expatriates or non-domiciled individuals. Traditionally, the UK taxed worldwide assets of those who were UK-domiciled (under common law rules) or deemed domiciled, whereas non-doms’ offshore assets were excluded. From 6 April 2025, domicile status is largely being replaced by a long-term residence test for IHT purposes. Broadly, an individual will be treated as UK-domiciled for inheritance tax once they have been UK tax resident for 10 out of the previous 20 tax years (these persons are now termed “long-term UK residents”).
Someone who meets this 10/20 test will be within the UK IHT net on their worldwide assets (regardless of their official domicile) – meaning their non-UK assets become subject to UK Inheritance Tax in the same way as UK assets. Importantly, if a long-term resident then leaves the UK, there is a tail period during which they remain within scope: up to 10 full tax years after leaving, depending on how long they had been here. (For example, a person who was UK resident for 15–20 years stays within IHT scope for 10 years after departure; someone who was here exactly 10 years would have a 3-year post-departure tail.) Only after this period of non-residence will their overseas assets cease to be liable to UK IHT.
This new residence-based regime means that many individuals who were formerly non-domiciled (or who set up non-UK trust structures for their assets) could get caught by UK inheritance tax if they have been here long enough. Existing excluded property trusts (offshore trusts set up by non-doms) are also affected – generally, trust assets settled while the settlor was non-UK domiciled remain protected, but additions or changes could bring assets into charge under the new rules. The details are complex and HMRC has issued guidance with examples. If you are internationally mobile or have an estate that includes non-UK assets, it is crucial to get specialist advice under these new rules, as the old concept of “domicile” for IHT has essentially been replaced and the planning landscape has changed significantly.
Pensions and IHT: unused funds to be taxable (from 2027)
Another major upcoming change will affect those who have substantial pension pots. Under current rules, most unused defined-contribution pensions can be passed to beneficiaries on death outside the estate and free of Inheritance Tax. From 6 April 2027, however, most unused pension funds and pension death benefits will become subject to IHT by being brought into the estate of the deceased. In practice, this means if you leave behind pension money (in a drawdown account, for example), it may no longer escape inheritance tax – it will be counted along with your other assets when calculating the estate’s tax bill.
Personal representatives (executors) will be responsible for reporting and paying any Inheritance Tax due on these pension assets (whereas currently the pension scheme usually isn’t involved in IHT reporting). It’s important to note some exceptions: death-in-service lump sum benefits from an employer’s pension scheme will remain exempt from IHT, and pensions in payment from defined-benefit schemes are not affected. Also, as with any assets, if your spouse or civil partner is the beneficiary of your pension, the spouse exemption still applies – transfers to a surviving spouse are IHT-free.
Jennifer Wiss-Carline is a practising Solicitor regulated by the SRA and a Chartered Legal Executive (FCILEx), bringing over two decades of experience to her practice. Specialising primarily in Private Client law, Jennifer expertly handles matters including Wills, Inheritance Tax and Estate planning, Lasting Powers of Attorney for individuals and businesses, Deputyship Orders and more.
