Dealing with a loved one’s estate can feel overwhelming, especially when the subject of inheritance tax (IHT) comes up. Understanding how the thresholds and allowances work can bring real clarity and help you plan ahead with confidence.
This guide explains the key IHT thresholds in England and Wales, what the nil rate band (NRB) and residence nil rate band (RNRB) mean in practice, and how the most common exemptions and reliefs apply. It’s important to always check the latest figures on gov.uk, as thresholds can change.
What is the inheritance tax threshold?
The inheritance tax threshold is the total value an estate can reach before any IHT becomes payable. In England and Wales, the standard IHT rate on everything above the threshold is 40%.
At the time of writing, the two main thresholds are:
- The nil rate band of £325,000, which applies to every individual
- The residence nil rate band of up to £175,000, an additional allowance available when a home is left to direct descendants
In the right circumstances, a married couple or civil partners can combine their allowances and pass on up to £1 million entirely free of IHT.
Both thresholds are currently frozen until at least April 2030. Because property values and savings have generally risen while the thresholds have stayed fixed, more estates are being brought within the scope of IHT than in previous years.
What is the nil rate band?
The nil rate band is the basic, individual IHT-free allowance. It has stood at £325,000 since 2009 and applies to the total value of an estate, including property, savings, investments and personal possessions, after deducting debts and reasonable funeral costs.
Everything above the NRB is taxed at 40%. Because the NRB hasn’t risen in line with inflation or house price growth over recent years, many families that wouldn’t consider themselves particularly wealthy are finding their estates exceed it.
If your estate is likely to be worth more than £325,000, it’s worth taking professional advice sooner rather than later.
What is the residence nil rate band?
The residence nil rate band is an additional IHT-free allowance introduced in 2017. It allows up to £175,000 of a home’s value to pass free of IHT, provided two conditions are met:
- The property must be the deceased’s main residence, not a buy-to-let or holiday home
- It must be passed to direct descendants, such as children, stepchildren, adopted children, foster children, or grandchildren
The RNRB can’t exceed the value of the property being passed on. So if the home is worth £120,000, the RNRB available is capped at £120,000, not the full £175,000.
A downsizing addition is also available for people who sold or moved to a smaller home on or after 8 July 2015. This can preserve some or all of the RNRB even if the estate no longer includes a property of sufficient value, provided the proceeds from the sale remain within the estate.
Full technical guidance on the RNRB is available from HMRC.
How does the residence nil rate band taper for large estates?
For larger estates, the RNRB reduces gradually. For every £2 by which an estate’s value exceeds £2 million, the available RNRB falls by £1.
In practice, this means:
- An individual’s RNRB disappears entirely once the estate reaches approximately £2.35 million
- A couple’s combined RNRB of £350,000 disappears once the combined estate reaches approximately £2.7 million
Importantly, the estate value used for this taper test is calculated before deducting reliefs such as business relief or agricultural relief. This catches some estates that might otherwise appear to fall below the trigger point.
How does the transferable nil rate band work?
When you leave your estate to a spouse or civil partner, no IHT is payable on that transfer. This is known as the spouse exemption. Crucially, if any of the deceased’s NRB or RNRB is unused at that point, the unused percentage can be transferred to the surviving partner.
Here’s a straightforward example:
- Spouse A dies and leaves everything to Spouse B, using none of their NRB
- Spouse B’s estate can later claim 100% of Spouse A’s unused NRB, giving a combined NRB of £650,000
- If both RNRBs are also fully transferable, the combined allowance rises to up to £1 million
It’s the percentage of the unused band that transfers, not a fixed cash amount. So if the NRB rises in future, the transferred percentage will be calculated against the higher figure at the time.
The executors (those appointed to administer the estate) must claim the transfer using forms IHT402 (for the transferable NRB) and IHT436 (for the transferable RNRB). It doesn’t happen automatically.
When do you pay inheritance tax?
IHT is normally due by the end of the sixth month after the person died. HMRC charges interest on any amount paid late.
In most cases, the executor must pay or arrange the IHT before the grant of probate (the legal authority to administer the estate) is issued. This can create a practical difficulty, as assets are often locked in the estate until probate is granted.
There are options that can help:
- Many banks will release funds directly to HMRC to pay an IHT bill before probate
- IHT on property and certain other assets can be paid in annual instalments over 10 years
- The estate, not individual beneficiaries, normally pays the bill
For more detail on what to expect at each stage, see our probate pricing page.
How does inheritance tax apply to property?
The family home is often the largest single asset in an estate and is included at its full market value for IHT purposes. A professional valuation is usually required.
A few key points on property and IHT:
- The RNRB can reduce the taxable value of a main residence passed to direct descendants, as explained above
- Buy-to-let properties and holiday homes don’t qualify for the RNRB, and their full value counts towards the estate
- Jointly owned property is generally included at the deceased’s share of its market value
- IHT on property can be paid in annual instalments over 10 years, avoiding the need to sell quickly under pressure
Selling a property to fund an IHT bill is sometimes the only practical option, particularly where the estate is property-rich but cash-poor. Our inheritance tax solicitors can help you understand your position and explore the options available.
What is the 7-year rule for gifts?
Gifts made more than seven years before death are normally free of IHT. These are known as potentially exempt transfers (PETs). However, if you die within seven years of making a gift, it may be counted back into your estate and could attract tax.
Where a gift falls between three and seven years before death, taper relief can reduce the effective rate of tax. However, a common misunderstanding is that taper relief reduces the amount of the gift counted into the estate. It doesn’t. Taper relief only reduces the tax payable on gifts above the nil rate band.
Years between gift and death | Tax rate on gift |
|---|---|
Less than 3 years | 40% |
3 to 4 years | 32% |
4 to 5 years | 24% |
5 to 6 years | 16% |
6 to 7 years | 8% |
7 years or more | 0% |
Full guidance on gifts and IHT is available on gov.uk.
What gifts and exemptions are free of inheritance tax?
Not every transfer triggers IHT. The main exemptions worth knowing include:
- Annual exemption: You can give away up to £3,000 per tax year with no IHT consequences. Any unused amount can be carried forward by one year only.
- Small gifts: You can give up to £250 to any number of different people in a tax year, provided you haven’t used another exemption on the same person.
- Wedding or civil partnership gifts: Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
- Regular gifts out of income: Gifts made from surplus income as part of a regular pattern, where they don’t affect your own standard of living, are exempt with no upper limit.
- Spouse or civil partner transfers: Transfers between spouses and civil partners are fully exempt from IHT.
- Charitable gifts: Gifts to UK-registered charities are entirely exempt. If you leave at least 10% of the net estate to charity, the IHT rate on the remainder drops from 40% to 36%.
How can you reduce your inheritance tax liability?
There are a number of legitimate ways to reduce an estate’s exposure to IHT. The most widely used include:
- Making full use of your NRB and, where eligible, your RNRB
- Leaving assets to a spouse or civil partner to use the spouse exemption and defer any IHT
- Making gifts within your annual exemptions and aiming to survive seven years
- Charitable giving, including structuring your Will to benefit from the 36% reduced rate
- Taking out life insurance written in trust, so the payout sits outside the estate
- Placing assets into a trust during your lifetime
- Using a deed of variation after a death, which allows inherited assets to be redirected and can be effective for IHT purposes
This is general information, not legal advice. The right approach will always depend on your individual circumstances. If you’d like tailored advice, our inheritance tax solicitors are experienced in helping individuals and families across South Wales plan their estates effectively.
How Devonalds Solicitors can help
At Devonalds, we understand that inheritance tax can feel complicated and, at times, worrying. Our experienced team works with individuals and families across South Wales to provide clear, practical advice on estate planning, Wills, and probate matters.
Whether you’re planning ahead, administering an estate, or simply want to understand your position, we’re here to help. Visit our inheritance tax solicitors page to find out more, or explore our probate pricing and Wills pricing pages to understand your options.
Frequently asked questions about inheritance tax thresholds
What is the current inheritance tax threshold?
The nil rate band is £325,000 per person and the residence nil rate band is up to £175,000, at the time of writing. Both are frozen until at least April 2030. Always check the most up-to-date figures on gov.uk.
Can married couples combine their nil rate bands?
Yes. Spouses and civil partners can transfer any unused nil rate band and residence nil rate band to the surviving partner. In the right circumstances, this gives a combined allowance of up to £1 million. The executors must claim it using the relevant HMRC forms; it doesn’t happen automatically.
Does the residence nil rate band apply to all properties?
No. It only applies to a main residence passed to direct descendants such as children, stepchildren, grandchildren, or other lineal descendants. It doesn’t apply to buy-to-let properties, holiday homes, or property left to anyone other than direct descendants.
How much is inheritance tax above the threshold?
The standard rate is 40% on the value of the estate above the available thresholds. If at least 10% of the net estate is left to a UK-registered charity, the rate on the remainder reduces to 36%.
Are there any exemptions from inheritance tax?
Yes. The main exemptions include transfers between spouses and civil partners, gifts to UK-registered charities, the £3,000 annual gift exemption (with one year’s carry-forward), small gifts of up to £250 per person, wedding gifts, and regular gifts made out of surplus income.
Do you pay inheritance tax on gifts given before death?
Gifts made more than seven years before death are normally exempt. Gifts made within seven years may be counted back into the estate, though taper relief can reduce the effective tax rate on gifts made between three and seven years before death. Taper relief applies only to gifts above the nil rate band.
Is the inheritance tax threshold different in Scotland or Northern Ireland?
IHT is a UK-wide tax, so the same thresholds apply across the UK. However, probate and estate administration procedures differ between England and Wales, Scotland, and Northern Ireland. This guide relates specifically to the position in England and Wales.
Contact our estate administration solicitors today
Devonalds Solicitors provide clear, practical guidance on inheritance tax and estate planning from our offices in Bridgend, Caerphilly, Church Village, Tylorstown, Tonypandy, Talbot Green, Treorchy, and Pontypridd.
Call us on 01443 779050 or use our online enquiry form and we’ll get back to you as soon as possible.