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Inheritance Tax explained

The thresholds, the 40% rate, gifts and what is changing for pensions, in plain English.

The short answer

Inheritance Tax is charged at 40% on the part of an estate above the available thresholds when someone dies. The standard threshold, the nil-rate band, is £325,000. An extra residence nil-rate band of up to £175,000 can apply when a home is left to children or grandchildren. Gifts and anything left to a spouse or civil partner are treated differently.

The thresholds

  • Nil-rate band: £325,000 per person. Anything under this is not taxed.
  • Residence nil-rate band: up to £175,000 per person, if you leave your main home to direct descendants. It reduces by £1 for every £2 that the estate is worth over £2 million.
  • Spouse or civil partner: anything left to them is exempt, and unused allowance can usually be passed to the survivor, so a couple can often pass on up to £1 million without Inheritance Tax.

These thresholds have been frozen, and the government has said they will stay at these levels until April 2031. As prices rise, more estates are pulled into the tax.

A worked example

Imagine a widow leaves an estate of £800,000, including a £450,000 home that goes to her children. Her own allowances are £325,000 and £175,000, plus unused allowances from her late husband, which could bring the total tax-free amount to £1,000,000. In that case no Inheritance Tax is due. Without the unused allowances, £500,000 would be tax-free and the remaining £300,000 would be taxed at 40%, a bill of £120,000.

Gifts and the seven-year rule

You can give away money during your life. If you die within seven years of making a gift, it may count towards your estate, and tax may be due on gifts above the nil-rate band, with a sliding reduction called taper relief after three years. Smaller gifts, such as £3,000 a year, regular gifts out of surplus income and wedding gifts, are often exempt. The exact rules are detailed, so check GOV.UK.

Pensions are changing

From 6 April 2027, unused pension pots are due to be included in the estate for Inheritance Tax. This is a big change from the current rules, so if pensions are a large part of your wealth, it is worth getting advice before then.

Charity

Leaving at least 10% of your net estate to charity can reduce the rate on the rest of the estate from 40% to 36%.

Where to learn more

This guide is for information only and is not tax or legal advice. Inheritance planning can be complex, so consider a qualified adviser.

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