IHT Spousal Exemption Planning: Making the Most of Both Nil-Rate Bands

The inheritance tax spousal exemption is one of the most important reliefs in the UK IHT code. For married couples and civil partners who are both UK-domiciled (or both long-term UK residents, under the new residence-based IHT regime from April 2025), it allows unlimited transfers of wealth — during lifetime and on death — completely free of IHT.

However, the exemption has nuances. The position for internationally mobile couples where one or both partners are not UK-domiciled (or not long-term UK residents) is more restrictive, and the rules reward careful planning. Understanding how to structure the combined estate of a married couple so that both sets of allowances are efficiently used requires deliberate planning — ideally well in advance of any transfer or death.

The Basic Spousal Exemption

Under section 18 of the Inheritance Tax Act 1984, transfers of value between spouses or civil partners are exempt from IHT — subject to one key qualification. The exemption applies in full where both spouses are UK-domiciled (or, under the new LTR regime from April 2025, where both are long-term UK residents).

This means that on the first death in a married couple, all assets can pass to the surviving spouse without any IHT charge — regardless of the size of the estate. The nil-rate band is not used on the first death (or is partially used if some assets pass directly to children or other non-exempt beneficiaries).

The exemption covers both:

• Lifetime transfers: a gift between spouses is an exempt transfer, not a potentially exempt transfer (PET). There is no seven-year survival requirement.
• Death transfers: assets passing to the surviving spouse under the Will or intestacy rules are fully exempt.

The Non-Domiciled Spouse Limitation

The full spousal exemption is only available where both spouses are UK-domiciled (or LTR under the new rules). Where the recipient spouse is non-UK domiciled (or non-LTR), the spousal exemption is limited to £325,000 cumulative (the same as the nil-rate band).

In practical terms: if a UK-domiciled/LTR individual leaves an estate of £2 million to a non-domiciled (non-LTR) spouse, only £325,000 is covered by the limited spousal exemption. The remaining £1,675,000 is potentially subject to IHT at 40% — a charge of £670,000.

This limitation affects many internationally mobile couples — where, for example, one spouse is British and the other is a foreign national who has been resident in the UK for fewer than 10 of the last 20 years (and therefore not an LTR under the reformed regime).

The Non-Dom Spouse Election

The non-domiciled (or non-LTR) spouse can address this limitation by making an election to be treated as a long-term UK resident for IHT purposes (before 6 April 2025 this was an election to be treated as UK-domiciled; the residence-based regime reframed it, but the principle is the same). Once the election is made, the full unlimited spousal exemption becomes available — transfers from the UK-domiciled/LTR spouse to the electing spouse are fully exempt.

However, the election carries a significant trade-off: the electing spouse's worldwide assets become subject to UK IHT once the election is in force. A non-domiciled individual with substantial overseas assets who makes this election brings those assets into the UK IHT net — potentially a worse outcome overall than the limited spousal exemption if the overseas assets are large.

The decision whether to make the election requires careful quantitative analysis:

• What is the value of the UK-domiciled spouse's estate that will pass to the non-dom spouse?
• What are the overseas assets of the non-dom spouse?
• How long is it likely to be before the non-dom spouse's own death?
• What is the overall IHT exposure in each scenario?

The election is irrevocable once made (during the lifetime of the person who made it), so the analysis must be thorough. In some cases the election is clearly beneficial; in others it creates more exposure than it saves. Professional advice is essential.

The election can also be made by the personal representatives of a deceased non-domiciled spouse in certain circumstances, providing some post-death planning flexibility.

The Transferable Nil-Rate Band

Since October 2007, the unused nil-rate band (NRB) of a deceased spouse can be transferred to the surviving spouse's estate. If the first spouse to die leaves everything to the survivor (using the full spousal exemption), none of their NRB is used. On the second death, the estate benefits from two full NRBs — currently 2 × £325,000 = £650,000.

The transfer of unused NRB is not automatic — it must be claimed by the personal representatives of the second estate (within two years of the second death) by submitting evidence that the first spouse's NRB was unused (or partially used). Keep records of the first spouse's death certificate and Will in easily accessible storage.

The NRB has been fixed at £325,000 since 2009 and is currently frozen until at least April 2031, meaning its real value erodes with inflation over time.

The Residence Nil-Rate Band

In addition to the standard NRB, the residence nil-rate band (RNRB) provides an additional IHT-free allowance of up to £175,000 where the deceased's main home passes to direct descendants (children, grandchildren, or their spouses/civil partners).

Like the NRB, the RNRB is transferable between spouses. A couple where neither uses their RNRB on the first death can pass a combined RNRB of up to £350,000 to their estate on the second death.

Combined with the transferable NRB, a surviving spouse's estate can benefit from:

• 2 × NRB = £650,000
• 2 × RNRB = £350,000
• Total IHT-free threshold = £1,000,000

This £1 million threshold applies only where the property is passed to direct descendants and the estate value does not exceed £2 million (above which the RNRB tapers away by £1 for every £2 of excess — extinguished entirely at £2.35 million of estate value).

For high-net-worth couples with estates substantially above £2 million, the RNRB is unlikely to be available. However, for couples with estates in the £1–2 million range, maximising the RNRB is an important planning consideration.

Nil-Rate Band Discretionary Trusts: Is a "First Death" Trust Still Useful?

Before the NRB became transferable in 2007, it was common for solicitors to include a nil-rate band discretionary trust in Wills. On the first death, assets equal to the NRB would be placed into a discretionary trust (rather than passing to the surviving spouse), thereby using the first NRB and preventing it from being unused.

With the NRB now transferable, the nil-rate band discretionary trust has lost its primary tax rationale for most couples. However, it continues to be used for reasons of flexibility:

• Assets in the trust are managed by trustees and can be distributed to different beneficiaries as circumstances change
• The trust can provide asset protection (the assets are not in the surviving spouse's estate and are therefore potentially protected from future care costs or divorce)
• The trust can hold illiquid assets (such as shares in a private company) that would be difficult to administer in a straightforward spousal legacy

Where estate planning solicitors recommend retaining a nil-rate band discretionary trust, the reason should be clearly explained and the additional administration costs weighed against the benefits.

Planning the Order of Gifts and Bequests

For couples with estates significantly above the combined IHT threshold, the order in which assets are left can affect the total IHT bill across both estates. Key principles:

• Leave IHT-efficient assets to the surviving spouse (assets with BPR, APR, or pension benefits) — so they can potentially pass these on without IHT from the second estate
• Use the NRB for direct bequests to children on the first death where the combined estate is likely to exceed the available thresholds on the second death, to prevent the first NRB from being transferred rather than used

This analysis depends on the projected size of the surviving spouse's estate, the composition of assets, and the time horizon. A financial model covering both deaths is the most useful planning tool.

Lifetime Giving Between Spouses

As noted, lifetime gifts between spouses are fully exempt from IHT (subject to the non-dom limitation). This can be used proactively to:

• Equalise estates between spouses (where one has a significantly larger estate) before either makes larger PETs or sets up trusts — ensuring both spouses make efficient use of their individual NRBs, annual exemptions, and other reliefs
• Transfer assets to a lower-income spouse to reduce income tax on investment returns, independently of IHT considerations

Equalisation is a common estate planning technique that should be considered as part of any regular estate planning review.

How Global Investments Can Help

The spousal exemption, combined with the transferable NRB and RNRB, provides a powerful framework for estate planning — but making the most of it requires proactive structuring, particularly for internationally mobile couples with non-domiciled or non-LTR spouses. Global Investments works with couples and their advisers to:

• Map the combined estate and identify IHT exposure across both potential orders of death
• Advise on the non-dom spouse election and model the net outcome
• Coordinate with solicitors on Will drafting to ensure NRBs and RNRBs are efficiently deployed
• Review lifetime gifting strategies including interspousal transfers, PETs to children, and annual exemption usage
• Ensure pension nominations complement the overall estate plan

Tax treatment depends on individual circumstances and may change in future. The residence-based IHT reform from April 2025 means that some aspects of this guide may evolve as legislation is finalised. Always seek qualified legal and tax advice tailored to your specific circumstances.

Contact Global Investments to review your estate plan and ensure both spouses' IHT allowances are being used as efficiently as possible.