Mark McLaughlin looks at when an estate worth up to £1m might be passed upon an individual’s death without an inheritance tax bill.
Everyone is entitled to an inheritance tax (IHT) ‘nil-rate band’ of up to £325,000 (for 2025/26) on death, reduced by any gifts which are not exempt within seven years before death.
That’s not all…
In addition, unused nil-rate band of a deceased spouse (or civil partner) is generally available to be transferred to the surviving spouse. The survivor’s nil-rate band can be increased by up to 100%, or one additional nil-rate band (i.e., a maximum of £325,000).
Furthermore, a claim for extra nil-rate band (‘residence nil-rate band’ (RNRB)) of up to £175,000 (for 2025/26) is available broadly where the family home (or an interest in it) is passed on death to a lineal descendant of the deceased (e.g., adult offspring or grandchildren). However, the RNRB is subject to a tapered withdrawal where the deceased’s estate is valued at more than £2m on death.
The RNRB is also available in certain circumstances involving ‘downsizing’ to a less expensive property, or where a residence ceases to be owned altogether.
Unused RNRB of an earlier deceased spouse is also generally available to be transferred to the surviving spouse on their death, up to a maximum of £175,000 (for 2025/26).
Hitting the jackpot!
A combination of the deceased’s own nil-rate band (£325,000) plus transferred nil-rate band from the earlier death of the deceased’s spouse (£325,000), plus the deceased’s RNRB (£175,000), plus transferred RNRB from the deceased’s spouse (£175,000) means that in certain circumstances estates worth up to £1m can be passed on to future generations, IHT-free.
Example: Leaving everything to the kids
Andrew and his wife Belinda jointly own their matrimonial home equally as tenants-in-common.
Andrew died on 31 October 2021, having made no lifetime gifts in the previous seven years. In his will, Andrew left his entire estate to Belinda, comprising an interest in the family home worth £250,000, investment account balances of £125,000, and one buy-to-let property worth £375,000.
Belinda died on 10 March 2025. She had made no lifetime gifts in the previous seven years. Belinda’s estate was worth £1.8m. It comprised the matrimonial home (now worth £725,000), investment account balances of £375,000, and buy-to-let properties worth £700,000. Belinda’s will left her entire estate to the couple’s two adult children.
In arriving at the IHT liability on Belinda’s death, her personal representatives are able to deduct her own nil-rate band and RNRB, plus the unused nil-rate band and RNRB transferred from Andrew, a total of £1,000,000.
The IHT payable in respect of Belinda’s estate is therefore £320,000 (i.e., £1,800,000 - £1,000,000 x 40%).
The transferable nil-rate band and transferable RNRB must both be claimed within statutory time limits. Records and documents should be kept in support of both, to assist claims on the death of the surviving spouse or civil partner.
Practical tip
Married couples (and civil partners) should review their wills, not only to ensure that their estates pass on death in accordance with their wishes, but also to confirm that their wills are as IHT-efficient as possible based on the individual’s personal circumstances. Expert professional advice is highly recommended.
