Doubling the tax-free estate

Transferable nil rate band

There are two relatively common situations where estates can benefit from more than two nil rate bands (NRBs): where someone is widowed; or the estate is entitled to business property relief (BPR) or agricultural property relief (APR). The following three examples illustrate how these work.

Widows and widowers

If someone dies leaving everything to their spouse/civil partner who remarries, the surviving spouse/partner can claim an extra NRB.

Example 1. When Jamal died he left a widow, Tilly and a son. His estate was worth £350,000 which he left to Tilly. This is an exempt gift (transfer) and so there was no inheritance tax (IHT). Tilly marries again, to Charles, a divorcee, who has a daughter. Tilly and Charles want to leave 50% of their joint estate to their respective children. Tilly dies first - her estate is entitled to her NRB of £325,000 but can also claim the TNRB from Jamal’s, i.e. another £325,000 (£650,000 in total). When Charles dies his estate is entitled to his NRB. That’s three NRBs in all.

To get the benefit of Jamal’s NRB if Tilly dies before Charles she must pass some of her estate (ideally enough to use her NRB) to her son and not as an exempt gift to Charles.

Example 2. Daisy is married to Steve and they have a son, Joe. Steve dies leaving all his estate to Daisy. Daisy marries Richard; he has one child, Jane. Their combined estate is worth £975,000, which they want to leave equally between Joe and Jane. If Daisy leaves £325,000 of her estate to a discretionary trust (with Richard as a named beneficiary) and the rest to Richard direct, Steve’s TNRB is used against the £325,000 Daisy gave to the trust when she died. There’s also no IHT on the assets which pass to Richard because that is an intra-spouse transfer and so is exempt. Daisy’s NRB is unused at this point and can be transferred to Richard’s estate when he dies.

Using NRB to maximise BPR

If an individual is married (or in a civil partnership), have children and own assets that qualify for BPR or APR there’s scope for some IHT planning.

Example 3. Gurmit was married to Preet and had two children. He died in April 2022 leaving an estate worth £1.7 million including a share in the family home, investments and business assets worth £600,000 qualifying for full BPR. His will passed £325,000 of his investments to his children and the remainder of his estate to Preet. The gift to his children is covered by his NRB while the transfer to Preet is an exempt transfer, so his estate pays no IHT. When Preet dies her estate consists of all the assets from Gurmit (for simplicity we’ve assumed their value is unchanged) plus other investments making her estate worth £2 million. The IHT bill on Preet’s estate is £290,000.

If instead Gurmit left £325,000 worth of his business assets to his children instead of other assets and a few months later Preet bought the shares from her children for £325,000, the children and Preet are in the same financial postion as shown above but the IHT bill is reduced to £160,000, a saving of £130,000