The short answer
- Everyone has a £325,000 nil-rate band. Leaving a home to children or grandchildren adds up to £175,000.
- A married couple or civil partners can pass on up to £1 million tax-free between them.
- Above that, the rate is 40%, or 36% if at least 10% of the estate goes to charity.
- The allowances are frozen until April 2030. Unused pensions will count from April 2027.
The two tax-free bands
The nil-rate band of £325,000 applies to every estate. It has not changed since 2009 and is frozen until April 2030.
The residence nil-rate band of up to £175,000 applies when a home the person lived in passes to their direct descendants: children, grandchildren, step-children, adopted and foster children, and their spouses. It is limited to the value of the home. If they sold or downsized after July 2015, it can still be claimed against other assets left to descendants.
- Estate£700,000
- Nil-rate band−£325,000
- Residence nil-rate band−£175,000
- Taxable£200,000
Left to nieces and nephews instead, the residence band would not apply and the tax would be £150,000.
Married couples and civil partners
Anything left to a spouse or civil partner is exempt. Any part of the first partner’s nil-rate bands that is not used passes to the survivor, so on the second death the estate can have up to £650,000 of nil-rate band and £350,000 of residence band.
- Gifts to each other
- Exempt
- Unused bands
- Pass to the survivor
- Most tax-free
- £1,000,000
- Gifts to each other
- Taxable
- Unused bands
- Lost
- Most tax-free
- £500,000 each
The transfer is claimed by the executors on the second death, using form IHT402. They will need details of the first estate, so keep the paperwork.
How much tax at different estate sizes
| Estate | Single person | Widowed, full transfer |
|---|---|---|
| £500,000 | £0 | £0 |
| £750,000 | £100,000 | £0 |
| £1,000,000 | £200,000 | £0 |
| £1,500,000 | £400,000 | £200,000 |
| £2,000,000 | — | £400,000 |
| £3,000,000 | — | £940,000 |
Estates over £2 million
The residence nil-rate band is reduced by £1 for every £2 the estate is worth above £2 million. For a single person it disappears at £2.35 million. For a widowed person with a full transfer, it disappears at £2.7 million. The test uses the estate’s value after debts but before reliefs and exemptions.
| Estate | Residence band left | Inheritance Tax |
|---|---|---|
| £2,200,000 | £250,000 | £520,000 |
| £2,400,000 | £150,000 | £640,000 |
| £2,700,000 | £0 | £820,000 |
Between £2 million and the end of the taper, each extra £1 of estate costs 60p in tax: 40% on the pound itself and 20p from the lost allowance.
Gifts and the 7-year rule
Gifts to people are “potentially exempt”. If the giver lives for 7 years, they fall out of the estate. If not, they are added back and use up the nil-rate band first, before the rest of the estate.
- 0 to 3 yearsFull 40% on any tax due on the gift
And the gift uses the nil-rate band first.
- 3 to 4 years32%
Taper relief of 20%.
- 4 to 5 years24%
Taper relief of 40%.
- 5 to 6 years16%
Taper relief of 60%.
- 6 to 7 years8%
Taper relief of 80%.
- 7 years or moreNothing
The gift is outside the estate.
- Gift above the £325,000 band£75,000
- Tax at 40%, less 40% taper reliefPaid by the son£18,000
- Estate: nil-rate band used up by the gift£0 left
- Estate tax: £500,000 less £175,000 residence band, at 40%£130,000
Taper relief only reduces tax on the gift itself
A common misunderstanding: if a gift is within the nil-rate band, there is no tax on it to taper. It still uses the band, so the estate pays more. Only after 7 years does the band come back.
Gifts that are always exempt
| Gift | Limit |
|---|---|
| Annual exemption | £3,000 a year, plus last year's if unused |
| Small gifts | £250 a person a year, if no other gift to them |
| Wedding or civil partnership | £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else |
| Regular gifts from surplus income | No limit, if your standard of living is not affected |
| To a spouse or civil partner | No limit, if both are UK-resident |
| To charities and political parties | No limit |
Gifts out of surplus income are the most valuable and least used. Keep a record of income, spending and gifts each year so the executors can prove the pattern.
Leaving 10% to charity
If at least 10% of the “baseline amount” goes to charity, the rate on the rest of the taxable estate falls from 40% to 36%. The baseline is the estate after debts, reliefs, exemptions and the nil-rate band, with the charity gift added back.
- Tax with no charity gift£200,000
- Baseline amount£675,000
- 10% to charity£67,500
- Tax at 36% on the rest£155,700
Business and farm relief from April 2026
Since 6 April 2026, business property relief and agricultural property relief give 100% relief on the first £2.5 million of qualifying property combined, and 50% above that. A spouse or civil partner can inherit any unused part of the allowance, so a couple can pass on up to £5 million of qualifying assets free of Inheritance Tax, on top of the nil-rate bands. Shares on AIM get 50% relief.
- Estate£3,700,000
- 100% relief on £2.5 million−£2,500,000
- 50% relief on the other £500,000−£250,000
- Nil-rate band−£325,000
- Residence band, lost to the taper£0
- Taxable£625,000
Tax on business and farm property can be paid in 10 yearly instalments, interest-free.
Pensions from April 2027
For deaths on or after 6 April 2027, most unused pension funds and death benefits will be part of the estate. That ends their role as a way to pass money on free of Inheritance Tax. Pensions left to a spouse or civil partner stay exempt, as do death-in-service benefits.
- Inheritance Tax before April 2027£20,000
- Inheritance Tax from April 2027£140,000
Beneficiaries may also pay Income Tax on the pension if the person dies at 75 or over, so the combined rate on inherited pensions can be high. Many people are now reviewing whether to draw pensions earlier and spend or give the money.
Paying the tax
- Inheritance Tax is due by the end of the sixth month after the death. Interest is charged after that.
- Most of it must be paid before probate is granted, often from the deceased’s bank accounts through the Direct Payment Scheme.
- Tax on property can be paid in 10 yearly instalments, with interest.
- Tax on lifetime gifts is paid by the person who received the gift.
Planning ideas
- Make a will, so the home passes to descendants and spouse exemptions are used.
- Use the annual £3,000 exemption and give regularly from surplus income.
- Make larger gifts early, so the 7-year clock starts sooner.
- Consider life insurance written in trust to pay the expected bill.
- Review pensions before April 2027.
- Take professional advice before setting up trusts, which have their own tax rules.
What counts in the estate
The estate is everything the person owned at death, at its open market value on the day they died, less debts and reasonable funeral costs. That includes:
- their home, or their share of a jointly owned home;
- bank and building society accounts, cash ISAs and premium bonds;
- shares, funds, stocks and shares ISAs and other investments;
- cars, jewellery, antiques and household contents;
- money owed to them, and their share of any business;
- gifts with reservation, such as a home given away but still lived in rent-free.
Life insurance paid out to the estate counts too, unless the policy is written in trust. Jointly owned property is split according to each owner’s share; for spouses it is usually half each.
Downsizing and the residence band
People who sold a larger home or moved into care after 8 July 2015 do not lose the residence nil-rate band. The “downsizing addition” lets the estate claim the band against other assets left to direct descendants, up to the amount that would have been available on the old home.
The rules are detailed, and executors must claim the addition on form IHT436. Keep records of the sale price and date of any home sold in later life.
Trusts in brief
Putting assets into most trusts during your lifetime is a chargeable transfer. Anything above the nil-rate band is taxed at 20% straight away, and the trust may pay up to 6% every ten years and when assets leave it. Assets in trust are normally outside your estate after 7 years.
Trusts can protect assets for children or vulnerable beneficiaries, but they are complex and have their own Income Tax and Capital Gains Tax rules. Take professional advice before setting one up.
Life insurance and Inheritance Tax
A whole-of-life policy written in trust pays out on death without forming part of the estate. Many couples use a joint “second death” policy sized to the expected Inheritance Tax bill, so the family can pay it without selling the home. Premiums paid from surplus income can be exempt gifts.
Mistakes executors make
- Forgetting to claim the late spouse’s unused nil-rate bands.
- Undervaluing property or shares, which can lead to penalties.
- Missing lifetime gifts made in the 7 years before death.
- Paying the tax late: interest starts at the end of the sixth month after death.
- Distributing the estate before HMRC has agreed the figures.
Planning ahead also means deciding who can act for you if you lose capacity: the power of attorney cost calculator shows the fees to register a Lasting Power of Attorney.