Inheritance Tax (IHT) is charged at 40% on estates worth more than the nil-rate band when someone dies. With property prices rising, more families are being caught by it than ever before. This guide explains how IHT works and the exemptions that can significantly reduce or eliminate it.
The nil-rate band
Everyone has a nil-rate band of £325,000. The estate pays no IHT on the first £325,000 of assets. Anything above this threshold is taxed at 40%. The nil-rate band has been frozen at £325,000 since 2009.
The residence nil-rate band (RNRB)
If you leave your home to direct descendants (children, grandchildren), an additional £175,000 allowance applies. Combined with the nil-rate band, a single person can pass on up to £500,000 tax-free. A married couple can potentially pass on up to £1 million (by transferring unused allowances).
Transfers between spouses
Assets left to a spouse or civil partner are completely exempt from IHT — no limit. Additionally, any unused nil-rate band from the first spouse to die transfers to the survivor, effectively doubling their allowance.
The 7-year rule
Gifts made during your lifetime are potentially exempt transfers (PETs). If you survive 7 years after making the gift, it falls entirely outside your estate. If you die within 7 years, the gift may be partially or fully taxable (taper relief reduces the rate after 3 years).
What is exempt from IHT?
- Transfers between spouses/civil partners
- Gifts to UK charities
- Annual gift exemption: £3,000 per year
- Small gifts: up to £250 per person per year
- Wedding gifts (up to £5,000 from parents)
- Gifts from surplus income (regular pattern, from income not capital)
- Business Property Relief (qualifying business assets: 100% relief)
- Agricultural Property Relief
How to reduce an IHT bill
- Make use of annual gift exemptions every year
- Leave at least 10% of the net estate to charity (reduces the IHT rate from 40% to 36%)
- Consider life insurance in a trust to cover the potential IHT liability
- Use pensions (pension pots are generally outside your estate)
- Gift surplus income regularly (gifts from income are immediately exempt)
Reporting and paying IHT
The executor or administrator of the estate must report to HMRC (even if no tax is due) and pay any IHT owed within 6 months of the death. IHT on property can be paid in annual instalments over 10 years.
Understand your income tax position
IHT is separate from income tax, but income from inherited assets (rental income, dividends, interest) is subject to income tax. Use the income tax calculator to see how inherited income affects your overall tax position.