When it comes to inheritance tax (IHT), what you don’t know really can cost you. Many families assume that leaving everything to a spouse is the most tax-efficient route. But in some cases, that approach can result in missed allowances and unnecessary tax.
With the right planning, it’s possible to unlock additional inheritance tax allowances that would otherwise go unused. For example, a well-structured bequest – a gift left to someone in a will – can trigger the use of a nil rate band (NRB) and reduce the estate’s taxable value significantly. – potentially saving your family up to £130,000 in tax.
Key Insights
- Most estates can pass on £325,000 tax-free using the nil rate band (NRB)
- With planning, it’s possible to access three NRBs instead of two, saving up to £130,000 in tax
- A strategic bequest to a non-spouse can unlock otherwise lost allowances
- This is especially relevant for blended families and second marriages
- Wills must be structured carefully, and claims made using Form IHT402
- Use our free IHT Calculator to estimate your position and take action early
- Leaving everything to a spouse in a second marriage can result in a lost NRB and a larger IHT bill
What Is the Nil Rate Band?
The nil rate band (NRB) is the portion of an estate that is free from IHT. It’s currently set at £325,000 and has been frozen at this level since 2009. Each individual can pass on this amount tax-free.
If you pass on your main residence to a direct descendant, your estate may also benefit from the residence nil rate band (RNRB), which offers an additional tax-free threshold.
How Can Families Lose an NRB Without Realising?
Most couples can pass on two NRBs – one each – to reduce the inheritance tax owed on their estate. But in certain family structures, such as second marriages or blended families, a third NRB can become available. This happens when an unused NRB from a first spouse (e.g. a deceased partner in an earlier marriage) is preserved, and a second NRB is activated by a taxable bequest from a later spouse. This combination allows three NRBs to be applied to one estate, significantly reducing the overall IHT liability.
Here’s a common scenario we see with blended families:
Alan died in 2010 and left everything to his wife, Susan. Since transfers between spouses are tax-exempt, none of Alan’s NRB was used.
Later, Susan remarried James. When James passed away, he left £250,000 to Susan’s daughter from her first marriage, Rachel, and the rest to Susan.
Because James’s gift to Rachel was not exempt, it used his NRB. This enabled Susan’s estate to claim:
- Alan’s unused NRB
- Susan’s own NRB
- James’s NRB (now fully used)
As a result, her estate accessed three NRBs, shielding an extra £250,000 from tax – and saving £100,000 at the 40% IHT rate.
Why Does This Strategy Matter?
If James had left everything to Susan, his NRB would not have been used because transfers between spouses are tax-free. That unused NRB would then be lost, and Susan’s estate would only be able to apply two NRBs instead of three. This could have meant an additional £100,000 in inheritance tax liability for the family.
Without that specific bequest in James’s will, his NRB would have gone unused. This is a common oversight:
Many couples unintentionally lose an NRB by leaving everything to each other in a second marriage.
This planning tactic is especially helpful for:
- Blended families with adult children
- Estates close to or over the IHT threshold
- Couples who have remarried later in life
What Are the Rules for Using an Extra NRB?
To benefit from this approach:
- The couple must be married or in a civil partnership at the time of the first death
- The unused NRB must be formally claimed using Form IHT402
- The will must include a taxable bequest – a gift of money, property, or other assets – to someone other than the surviving spouse. These gifts are typically taxable and can be used to activate a nil rate band (NRB)
What Steps Should You Take Now?
Rising house prices are pushing more estates into the IHT bracket. Don’t assume your estate will be exempt – take action early:
- Review your current will
- Understand how much of your NRB and RNRB your estate may qualify for
- Consider the structure of any remarriage or blended family
- Try our Inheritance Tax Calculator to estimate what might be owed
Need Help Planning Your Estate?
At Ward Goodman, we specialise in tax-efficient estate planning. Whether you’re writing your first will or reviewing a second marriage scenario, we can help you make the most of your allowances. Contact our expert team today for specialist advice.
Use our Inheritance Tax Calculator or contact our estate planning specialists to reduce your IHT exposure and secure your legacy.
