Welcome to your Ask Octopus column, written by Tax Product Specialist at Octopus Investments, Toyin Oyeneyin. This is where, each quarter, we will tackle some of the more complex estate and tax planning questions that advisers are asking. Consider this your advice support column for all your estate planning queries!
This quarter’s question is: My client is looking to maximise their inheritance tax allowances with their spouse but I’m not sure on some of the technicalities around the nil rate band and the residence nil rate band. I’ve also heard of a new Business Relief allowance. What are the key considerations around these allowances and how do they all interact?
Toyin’s answer: First, let’s recap on the the nil rate band (NRB) and residence nil rate band (RNRB) before covering the new Business Relief (BR) allowance and the second part of the question.
The nil rate band, residence nil rate band and transferability
Every individual has a NRB of £325,000, which is the amount that can be left free from inheritance tax (IHT).
The RNRB is an additional £175,000 allowance, applicable when a home is left to direct descendants.
Any unused NRB and RNRB can be transferred between married spouses and civil partners on the death of a spouse. If the first spouse to die does not use their full NRB or RNRB, this means a surviving spouse could potentially have up to £1m in allowances when also claiming their own allowances (two NRBs at £650,000 and two RNRBs at £350,000).
A new £1 million Business Relief allowance
BR has existed for almost 50 years, but from 6 April 2026, each person will have a new unquoted BR allowance of £1m. This provides 100% IHT relief for qualifying assets (such as trading partnership interests or sole trader businesses) held for at least two years at death. Values above £1m still attract IHT relief, but at 50%.
Importantly, assets qualifying for BR do not use up the NRB or RNRB. Therefore, spouses can have up to £3m worth of IHT allowances across the NRB, RNRB and BR providing 100% relief from IHT.
Now onto the key part of the question on how we maximise these allowances, which in part, relates to being aware of some bear traps as well as strategies.
Bear traps
1.) £2m tapering test on the transferable RNRB
Estates over £2m lose £1 of RNRB for every £2 above this threshold. This is known as the ‘RNRB £2m tapering test’ and also applies when assessing the transferable RNRB. The key thing that is overlooked is that this test is applied before any spousal transfers or transfers of assets qualifying for relief.
2.) Transferable NRB or RNRB not available for in-life transfers
The transferable NRB and RNRB from a deceased spouse are only available against the death estate of the surviving spouse, not for in-life transfers (such as gifts into trust) that may give rise to an IHT chargeable lifetime transfer (CLT).
3.) Business Relief – £1m allowance is not transferable
While NRB and RNRB are transferable, the £1m unquoted BR allowance is not. So each person must ‘use it or lose it’!
4.) Mirror wills
In a typical “mirror will” scenario, where all assets pass to the surviving spouse, the survivor’s estate may exceed the £2m RNRB threshold or the £1m BR allowance, resulting in lost allowances (even if the first spouse’s estate was below £2m).
Strategies to maximise allowances
1.) In-life spousal transfers
Transferring assets between spouses can help keep each estate below £2m, preserving RNRB and transferable RNRB. Tax rules favour married couples and civil partners, allowing for tax efficient transfers with no capital gains tax or IHT implications.
2.) RNRB claims on first death
The RNRB does not have to be transferred where it is more optimal to do so. For example, if the joint estate exceeds £2.7m, transferring all assets to the surviving spouse may result in the loss of both RNRBs. Instead, transferring the deceased’s share of the home to children/grandchildren and claiming the RNRB on first death can be more effective.
A key point to note is that the property chosen for the claim does not have to be the main residence at death; any property owned at death and lived in at some point previously qualifies.
3.) Tactical structuring for BR: Max allowance and targeted death transfers
As the £1m unquoted BR allowance is not transferable, the first way I see advisers maximise this allowance for clients, is to ensure each spouse has at least up to £1m of unquoted BR assets in their own name.
If this is done, then on death, transferring BR assets to beneficiaries, rather than the spouse, can help to fully utilise the allowance, as spousal exemptions may otherwise lead to it being wasted. Or may tip the surviving spouse over their £1m allowance if they already hold unquoted Business Relief assets.
4.) In-life gifting and RNRB and BR allowance resets
Gifting assets during life can maximise the RNRB allowance and/or the unquoted BR £1m allowance. This can help reduce the estate below the £2m RNRB tapering test and regain the RNRB. Even if the donor dies within seven years of the gift, it will still not form part of the £2m tapering test.
While any asset can be gifted to help manage this tapering test, interestingly a gift of BR assets can help regain the RNRB and provide IHT relief from CLTs charges into trust, or relief if the individual dies within seven years of the gift, compared to a non-BR gift.
There is also a little-known rule that the £1m unquoted BR allowance resets every seven years. Meaning after holding qualifying assets for two years, gifting them (e.g. into trust) and surviving seven years, allows the allowance to be used again.
5.) If all else fails – a deed of variation
If assets were not optimally structured on death, a deed of variation within two years of death can amend the Will to maximise allowances, provided of course, all beneficiaries agree.
What this all underlines is how important the structuring of assets between spouses is. Having a well-structured Will in place is key for married couples who are hoping to have their estate distributed in alignment with their wishes, that at the same time, takes full advantage of IHT reliefs and available allowances. It requires careful consideration, transparent and early conversations between spouses and their beneficiaries, and an adviser to help them throughout the process. If done effectively, clients can maximise these allowances and importantly leave more behind to those they love most.
Hopefully that helps and I look forward to tackling more adviser queries around estate planning in the next quarter. If you can’t wait until then, please use our free helpdesk Ask Octopus.
