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Transferable Nil Rate Band


What is the Transferable Nil Rate Band?
Changes were made on 9th October 2007 to the way in which Inheritance Tax (IHT) was charged on the estate of a couple who had been married or who had been in a civil partnership.

Before 9th October 2007

Before the change was made, when someone died the first £325,000 of their estate was not subject to IHT. This is called the nil rate band (NRB). When one of a married couple (including civil partnerships) died and left their whole estate to the other, there was no tax to pay as gifts between married couples are exempt from IHT. This meant that on the first death there would be no IHT to pay, but on the second death, only £325,000 of the joint estates was exempt from IHT.

This led to many couples including a gift of the amount of the NRB in the Will of the first to die into trust for their family or an absolute gift to their children. In this way, two NRBs were used, one on each death, with a saving of £130,000 of tax following the second death.

After 9th October 2007

In what was widely regarded as a reaction to the Conservatives promise to bring in a NRB of £1 million, the Labour government introduced the Transferable Nil Rate Band (TNRB). This provides that if the second of a couple dies, and their previously deceased spouse had not used their NRB, then it can be claimed in addition to the recently deceased spouse’s NRB. Effectively, this ensured that the full £650,000 exemption was available to be deducted from the estate of the second to die, before calculating IHT at 40% on the balance.

Many commentators at the time stated that the NRB had been doubled to £650,000 which is clearly not the case. But unsurprisingly, now that the Conservatives are in power, they have said that the review of the level of the NRB is not a priority and it is unlikely to change for a few years.

How does it work in practice?

On a death, if the deceased had previously been married and the spouse or civil partner had died and had not utilised all of their NRB, then it can be used by the recently deceased person in addition to their own. This is not available for cohabitees.

For example, Susan dies with an estate of £1 million on 1st May 2009. Her husband Peter had died in 1996 leaving everything to Susan.

Susan’s estate                                                £1,000,000

Less Susan’s NRB                                                 325,000

Less Peter’s NRB                                                  325,000

Estate taxable at 40%                                          350,000

IHT                                                                   £140,000

If Peter had made some gifts to his children or other beneficiaries of say £100,000, then he will have used part of his NRB. The IHT threshold in 1996 was £200,000, so he will have used 50% of his NRB. So the calculation would then be:

Susan’s estate                                                £1,000,000

Less Susan’s NRB                                                 325,000

Less 50% of Peter’s NRB                                        162,500

Estate taxable at 40%                                          512,500

IHT                                                                   £205,000

What is needed to claim a TNRB?

It is up to the executors of the second spouse to die to claim the TNRB. To do this they have to prove that the first spouse did not use their full NRB on their death. The documents required are:

What change does this make to IHT advice?

Many clients who have included the NRB trust in their wills have asked us whether it is necessary to change their wills to take account of the change. Usually we advise them that it is not necessary and the reasons for this are as follows:

  1. If the wills are otherwise perfectly in order, there is no disadvantage to leaving them as they are. It merely gives their executors more choices and powers when needed.
  2. On the second death, if the trust is not needed, the executors can appoint the assets out to the remaining spouse within two years of the death, and it will be regarded by HMRC as having taken place at the date of death.
  3. By including the NRB trust in the will, there is no doubt that two NRBs will be utilised. The TNRB relies on the executors remembering to apply to HMRC for the exemption, for HMRC to allow the application and for the rules not to have changed by the time the second death occurs.
  4. We are finding that it is sometimes very difficult to satisfy HMRC on the circumstances of a death many years ago. If in the above example Peter had died in 1976 rather than 1996, would there still have been paperwork available regarding his death to prove to HMRC that he had not utilised his NRB? If it cannot be proved, it is lost.
  5. It is unlikely that the NRB will increase in value in the near future. It is therefore more likely that if assets are left into a NRB trust, they will increase in value faster that the NRB value will rise. This will mean that there will be more assets which are tax free on the second death.
  6. This trust structure has a number of benefits apart from just tax saving. By not placing all of the assets to the remaining spouse, should that spouse later remarry and then die without making another will, the assets in trust would be held for the benefit of the children, whereas the remaining assets may all pass to the new husband or wife. The trust will also provide some protection against the assets passing out of the family should there be a divorce or a family member getting into financial difficulties. It may also shelter assets from being used to pay for nursing care. It is a useful ‘family fund’ and is popular with clients whether or not there is a tax advantage.
  7. If there are business assets to pass, the trust structure is commonly used for those assets, to ensure that business property relief (BPR) is captured on the first death. The shares or business interests are passed into the trust on the first death without IHT being paid on their value by virtue of BPR. If the business is later sold, the value is passed into the trust, rather than into the estate of the surviving spouse where it would be taxable on their death.

Some points to note about the TNRB

This new arrangement has thrown up some interesting anomalies and unusual considerations:


This change in the law from 2007 has provided opportunities for executors to claim additional relief from IHT. It corrected a strange anomaly – that a couple only received one person’s allowance on the joint estate.

But as can been seen above, the relief is not straight forward and the need to apply and prove the facts can be a great obstacle to getting the second NRB. Better to ensure that the relief is granted by including in the wills and allow your executors to choose whether they use the trust, or pass assets to the remaining spouse.

As always, professional advice gives understanding of the choices to be made. 

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