How does transferring the unused nil rate band between spouses work for Inheritance Tax?

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The transferable nil rate band prevents Inheritance Tax being effectively wasted when the first spouse or civil partner in a couple dies leaving most or all of their estate to the survivor, since spouse-to-spouse transfers are themselves exempt from IHT. **Why the first death often uses little or none of the nil rate band** Transfers between UK-domiciled spouses and civil partners are exempt from Inheritance Tax regardless of amount. This means that if the first spouse to die leaves their entire estate to the survivor, none of their £325,000 nil rate band is actually used up by that death -- without a transfer mechanism, this unused allowance would simply be lost. **How the transfer works in percentage terms** The unused proportion (not a fixed cash amount) of the nil rate band from the first death is calculated as a percentage, and this percentage is then applied to whatever the nil rate band is at the time of the SECOND death (which could be higher if the nil rate band itself is later increased, though it has been frozen at £325,000 since 2009 and is set to remain frozen until at least April 2030). If 100% of the first spouse's nil rate band was unused, the survivor's own estate can benefit from up to 200% of the nil rate band applicable at their death -- currently up to £650,000 combined. **The residence nil rate band works similarly** A separate, similar transfer mechanism applies to the residence nil rate band (currently £175,000 each), which is available where a main residence is left to direct descendants. An unused percentage of the first spouse's residence nil rate band can also transfer to the survivor, potentially giving a surviving spouse up to £350,000 of residence nil rate band on top of up to £650,000 of standard nil rate band -- a combined potential IHT-free threshold of up to £1 million for a couple in the right circumstances. **Claiming the transfer is not automatic** The transferable nil rate band must be claimed by the executors of the second spouse's estate, using form IHT402, generally within two years of the end of the month in which the second spouse died (though HMRC has some discretion to extend this). Executors need details of the first spouse's estate, including any nil rate band used at that time, even if the first death was many years earlier and no Inheritance Tax return was needed at the time (since the estate was fully exempt). **Worked example** A husband dies leaving his entire £500,000 estate to his wife, using none of his nil rate band (fully exempt as a spousal transfer). When his wife later dies with an estate of £700,000, she can use her own £325,000 nil rate band plus the transferred 100% from her late husband, giving her estate a combined £650,000 nil rate band -- leaving only £50,000 potentially taxable, before considering the residence nil rate band or other reliefs. **Practical tip** Keep records of the first spouse's will and estate details even where no Inheritance Tax was payable at the time, since the surviving spouse's executors will need this information, potentially decades later, to successfully claim the transferable nil rate band.

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