Inheritance Tax Nil Rate Band Explained: 2024 Thresholds and Allowances

The nil rate band is the amount you can pass on without paying inheritance tax. Understanding how it works—and how to maximise it—could save your family hundreds of thousands of pounds.

What Is the Nil Rate Band?

The nil rate band (NRB) is the inheritance tax threshold—the amount that can be passed on free of inheritance tax. For the 2024/25 tax year, the nil rate band is £325,000.

This threshold has been frozen at £325,000 since 2009 and is set to remain frozen until at least April 2028. While this may seem straightforward, how you use this allowance can significantly impact the tax your beneficiaries pay.

How the Nil Rate Band Works

When someone dies, their estate is valued and inheritance tax is calculated as follows:

• The first £325,000 is taxed at 0% (the nil rate band)
• Everything above £325,000 is taxed at 40%
• Gifts to spouses, civil partners, and charities don't count toward the threshold

Example: John dies with an estate worth £500,000. After applying the nil rate band:

• First £325,000: £0 tax
• Remaining £175,000: £70,000 tax (40%)

Transferable Nil Rate Band for Married Couples

One of the most valuable IHT reliefs is the transferable nil rate band. When someone dies and leaves everything to their spouse or civil partner, they don't use their nil rate band. This unused allowance can transfer to the surviving spouse.

This means a married couple can potentially pass on £650,000 tax-free (2 x £325,000).

How Transfer Works

When the second spouse dies:

1. Calculate what percentage of the first spouse's nil rate band was unused
2. Apply that percentage to the nil rate band at the time of the second death
3. Add this to the second spouse's own nil rate band

Example: Mary died in 2010 with an estate of £162,500, leaving everything to her husband Peter. She used 50% of her nil rate band (which was also £325,000 at the time).

When Peter dies in 2024, his estate can claim:

• His own nil rate band: £325,000
• 50% of Mary's unused band: £162,500
• Total tax-free amount: £487,500

The Residence Nil Rate Band (RNRB)

Since April 2017, there's an additional allowance when you leave your home to direct descendants. For 2024/25, this is £175,000.

Who Qualifies as a Direct Descendant?

• Children (including stepchildren and adopted children)
• Grandchildren and great-grandchildren
• Spouses or civil partners of any of the above

Note: Siblings, nieces, nephews, and unmarried partners don't qualify for RNRB.

Combined Allowances

For a married couple leaving their home to children, the combined tax-free amount can be:

Allowance	Per Person	Couple Total
Nil Rate Band	£325,000	£650,000
Residence Nil Rate Band	£175,000	£350,000
Total	£500,000	£1,000,000

This is why you often hear that couples can pass on up to £1 million tax-free—though this only applies when leaving a home to direct descendants.

Residence Nil Rate Band Restrictions

There are important limitations on the RNRB:

The Taper for Large Estates

If your estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over the threshold. This means:

• Estate of £2.35 million: RNRB reduced to zero
• Estate of £2.2 million: RNRB reduced to £75,000

This affects wealthy homeowners in areas with high property values, particularly in London and the South East.

Downsizing and Selling

If you sell or downsize your home after 8 July 2015, you may still be able to claim the RNRB through 'downsizing provisions.' You need to:

• Have previously owned a home
• Leave assets of equivalent value to direct descendants
• Have sold or downsized for genuine reasons (not just to avoid IHT)

How to Claim the Transferred Nil Rate Band

When the second spouse dies, the executor must:

1. Complete form IHT402 (Claim to transfer unused nil rate band)
2. Provide evidence of the first spouse's estate value and how it was distributed
3. Submit with the inheritance tax return

There's no time limit for claiming the transferred nil rate band—you can claim even if the first spouse died decades ago.

Strategies to Maximise Your Nil Rate Band

1. Use Your Nil Rate Band During Lifetime

Consider using part of your nil rate band for gifts that might not qualify for exemptions:

• Gifts that become exempt after 7 years (potentially exempt transfers)
• Gifts into trust (which may be chargeable but use nil rate band)

2. Consider Nil Rate Band Discretionary Trusts

For married couples, using a nil rate band discretionary trust on first death can:

• Protect assets from the survivor's future care fees
• Shield inheritance from the survivor's new partner
• Provide flexibility in distribution

However, this means losing the transferable nil rate band, so professional advice is essential.

3. Life Insurance to Cover the Gap

If your estate will exceed available nil rate bands, consider life insurance written in trust to cover the expected tax bill. This provides funds to pay IHT without eating into the inheritance.

Common Mistakes with Nil Rate Bands

Assuming Everything Transfers

The nil rate band only transfers between spouses if assets passed to them or to charity. If the first spouse left £325,000 to children, there's nothing to transfer.

Forgetting About Previous Marriages

You can only transfer nil rate band from one deceased spouse. If you've had multiple marriages, you need careful planning to maximise allowances.

Not Keeping Records

To claim a transferred nil rate band, you need evidence from the first death—sometimes decades later. Keep copies of:

• The will
• Grant of probate
• Estate accounts
• Any IHT forms submitted

Future Changes to the Nil Rate Band

The nil rate band has been frozen since 2009, and the freeze has been extended until April 2028. In real terms, this means the threshold is worth less each year due to inflation.

Had the nil rate band increased with inflation, it would be approximately £460,000 today. This "fiscal drag" brings more estates into the IHT net each year.

Many estate planning professionals recommend planning based on current allowances rather than hoping for increases, as further freezes or even reductions are possible with future government changes.

Getting Professional Help

Understanding nil rate bands is just the first step. Maximising your allowances requires careful planning around:

• Your family structure
• Property ownership
• Existing wills and trusts
• Your overall estate value

An estate planner can help you make the most of available allowances while meeting your family's needs.