Inheritance tax is one of the most emotive taxes in the UK — and one of the most misunderstood. Most estates pay nothing. But as property values have risen, more families are being caught by a threshold that hasn't kept pace.
The nil-rate band: the starting point
The first £325,000 of any estate is completely exempt from IHT. This is called the nil-rate band. On amounts above this, the rate is a flat 40%.
So an estate worth £500,000 would owe: (£500,000 − £325,000) × 40% = £70,000 in IHT.
The nil-rate band has been frozen at £325,000 since 2009. Meanwhile, average UK house prices have risen from around £167,000 to over £280,000. This fiscal drag means far more estates now breach the threshold than was ever intended.
The Residence Nil-Rate Band: an extra £175,000
Since 2017, there is an additional allowance — the Residence Nil-Rate Band (RNRB) — worth £175,000 in 2025/26. It applies when:
- You leave your main home (or its equivalent value if it was sold) to a direct descendant
- Direct descendants include children, stepchildren, adopted children, foster children, and grandchildren
This brings the total potential threshold for an individual to £500,000 (£325,000 + £175,000).
For married couples and civil partners who leave everything to each other, unused thresholds transfer to the surviving spouse. This means a couple can collectively pass up to £1,000,000 tax-free.
Important caveat: the RNRB tapers away for estates worth over £2,000,000, reducing by £1 for every £2 above the threshold.
What is exempt from IHT?
A significant portion of most estates is exempt:
- Transfers to a spouse or civil partner — no limit, regardless of value
- Charitable gifts — fully exempt. Leaving 10%+ of your estate to charity also reduces the IHT rate on the rest from 40% to 36%
- Business Property Relief — qualifying business assets (including some AIM-listed shares) can be passed on at 0% or 50% IHT
- Agricultural Property Relief — qualifying farmland and farm buildings
- Pension funds — typically outside your estate (though rules changed from April 2027)
The 7-year rule: gifting early
Gifts you make during your lifetime are generally free of IHT if you survive for 7 years after making them. These are called Potentially Exempt Transfers (PETs).
If you die within 7 years, the gift is tapered — meaning the IHT charge reduces the older the gift was:
- 0–3 years before death: 40% (full rate)
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
- 7+ years: 0% (fully exempt)
This is why experienced estate planners advise starting gifting as early as possible. The clock starts from the date of each gift.
Annual exemptions: smaller gifts that are always free
Several gifting allowances are immediately exempt — no 7-year wait required:
- Annual exemption: £3,000 per year (unused allowance can carry forward one year)
- Small gifts: Up to £250 to any number of people
- Wedding/civil partnership gifts: £5,000 from parents, £2,500 from grandparents, £1,000 from others
- Gifts from income: Regular gifts from surplus income (not capital) are exempt, with no limit
Key strategies to reduce IHT
1. Give early and live 7 years. The 7-year clock starts on the date of each gift. A programme of regular giving can substantially reduce an estate over time.
2. Use the annual exemption every year. £3,000/year for 20 years = £60,000 gifted tax-free. Many people forget to use this.
3. Leave assets to charity. Charitable bequests are fully exempt and reduce your IHT rate from 40% to 36% on the remainder.
4. Invest in Business Property Relief assets. AIM-listed shares held for at least 2 years qualify for 100% Business Property Relief — meaning they pass outside your estate entirely.
5. Consider life insurance written in trust. A whole-of-life policy written in trust pays out directly to beneficiaries outside the estate, providing liquid funds to pay the IHT bill without having to sell property.
When does the estate pay IHT?
IHT must be paid within 6 months of the end of the month of death. HMRC charges interest on any outstanding amount after this date.
For property in the estate, it's often impossible to sell within 6 months. HMRC allows the IHT on property to be paid in annual instalments over 10 years, with interest charged on the unpaid balance.
The executors of the estate are responsible for paying IHT before probate is granted — meaning the estate must often find liquid funds to pay the tax before it can access the assets.
Frequently asked questions
What is inheritance tax in the UK?
Inheritance Tax (IHT) is a 40% tax on the estate (money, property, and possessions) of someone who has died, charged on the amount above their threshold. The standard nil-rate band is £325,000 — meaning the first £325,000 of an estate is tax-free. Married couples and civil partners can combine thresholds, giving a potential £650,000 tax-free allowance.
What is the residence nil-rate band?
The Residence Nil-Rate Band (RNRB) is an additional £175,000 threshold that applies when you leave your main home to direct descendants (children, grandchildren). Combined with the standard nil-rate band, individuals can pass up to £500,000 tax-free, and couples up to £1,000,000 — provided the estate doesn't exceed £2,000,000 (above which the RNRB tapers away by £1 for every £2 over the threshold).
What is exempt from inheritance tax?
Exempt from IHT: transfers to a spouse or civil partner (no limit), gifts to charities, gifts to political parties, assets passed to a disabled person, business property qualifying for Business Relief, and agricultural property qualifying for Agricultural Relief. Additionally, the first £3,000 of gifts per year (annual exemption), small gifts of up to £250 per person, and wedding gifts within limits are exempt.
How does the 7-year rule work for inheritance tax?
Gifts made more than 7 years before death are completely exempt from IHT (provided the giver derives no benefit from the gift — known as a Potentially Exempt Transfer or PET). Gifts made within 7 years before death are tapered: 0–3 years: 40% IHT; 3–4 years: 32%; 4–5 years: 24%; 5–6 years: 16%; 6–7 years: 8%; 7+ years: 0%. This means early gifting is one of the most effective IHT planning strategies.
When does inheritance tax have to be paid?
IHT must be paid within 6 months of the end of the month in which the person died. After 6 months, HMRC charges interest. In practice, many estates cannot sell property within 6 months, so HMRC allows IHT on property to be paid in annual instalments over 10 years — though interest accrues on the outstanding amount.