Inheritance Tax UK — Thresholds, Rates & How to Reduce It
Inheritance Tax (IHT) is charged on someone’s estate at death — and sometimes on lifetime gifts. Most estates pay nothing, because the thresholds are generous. But above them the bill is 40% of the excess, so it pays to understand the bands and what can legally reduce them. This guide explains the thresholds, rates, what counts, who pays, and how to cut the bill. It is general information only — in estate planning, professional advice is worth paying for, because a mistake can cost far more than the advice.
What counts in an estate?
An estate is everything the person owned at death, minus debts: property, savings and investments (bank accounts, shares, ISAs, bonds), possessions (cars, jewellery, art, furniture), and non-exempt gifts from the last 7 years. From 6 April 2027, most unused pension funds and death benefits fall within IHT; before that, most pension funds sit outside it. Debts, funeral costs and administration costs are deducted first.
The thresholds: the nil-rate band and the residence nil-rate band
There are two tax-free bands.
The nil-rate band: £325,000. The first £325,000 of an estate is tax-free. It has been frozen since 2009 and is frozen until 5 April 2031.
The residence nil-rate band: up to £175,000. On top of that, up to £175,000 more is tax-free — but only where a home is left to direct descendants (children, grandchildren, stepchildren). It is capped at the value of the home, and it tapers by £1 for every £2 the estate exceeds £2,000,000, disappearing entirely at £2,350,000.
Combined, the bands can shield up to £500,000 for a single person (£325,000 + £175,000), and up to £1,000,000 for a married couple or civil partners where both bands transfer to the surviving partner. The residence band only applies when a home passes to direct descendants.
The rates: 40%, or 36% with a charitable legacy
Tax is charged at 40% on the estate above the available bands. One exception: if at least 10% of the net estate is left to charity, the rate on the rest falls to 36% — and a charitable legacy can sometimes save more tax than the amount given away.
Worked example 1 — Single person, estate £600,000
A single person dies leaving £600,000, including a £300,000 home left to their children.
| Item | Amount |
|---|---|
| Total estate | £600,000 |
| Nil-rate band | £325,000 |
| Residence nil-rate band (home to children) | £175,000 |
| Total tax-free | £500,000 |
| Taxable amount (£600,000 − £500,000) | £100,000 |
| Tax at 40% | £40,000 |
Tax due: £40,000; the remaining £560,000 passes to the beneficiaries.
Worked example 2 — Married couple, combined estate £900,000
A married couple’s combined estate is £900,000, including a home left to their children. On the second death, the survivor uses both partners’ bands: two nil-rate bands (£650,000) plus two residence bands (£350,000) give £1,000,000 tax-free — more than the estate. So the taxable amount is £0 and no Inheritance Tax is due. Transferring unused bands is the single biggest planning point for most married couples.
Who pays, and when?
The executors — named in the will, or administrators if there is no will — value the estate, report it to HMRC and pay any tax due from the estate itself, not their own money. Tax is normally due by the end of the sixth month after the month of death (death in January means payment by 31 July), with interest on late payment.
Tax often falls due before probate and before assets can be sold. Executors can usually pay directly from the deceased’s bank accounts under HMRC’s Direct Payment Scheme, or pay themselves and reclaim it later. Tax on some assets, such as property, can be paid in instalments over ten years.
Gifts and the 7-year rule
Lifetime gifts can reduce the eventual bill — but only if the rules are followed.
Always tax-free: up to £3,000 per year (annual exemption; unused £3,000 can be carried forward one year, so up to £6,000), small gifts up to £250 per person per year, wedding gifts (£5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else), and unlimited gifts to a spouse or civil partner, or to a UK charity.
Potentially Exempt Transfers (PETs). Gifts above the exemptions are PETs: tax-free if the giver survives 7 years. If the giver dies within 7 years, the gift is added back, using up the nil-rate band first. Taper relief reduces the tax depending on survival:
| Years between gift and death | Tax rate on the gift |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% |
Taper relief only reduces the tax rate, not the value of the gift counted against the nil-rate band: a gift made 6 years before death still uses up the nil-rate band in full.
Gifts into trusts. Gifts into most trusts are Chargeable Lifetime Transfers, with an immediate 20% charge on the amount above the nil-rate band. Trusts have their place in estate planning, but they are not a simple way to avoid tax — take professional advice first.
Business and agricultural property reliefs
Reliefs for business and agricultural property can reduce or remove tax on qualifying assets and farmland. They are being reformed from April 2026 — check the current GOV.UK position before relying on them. If your estate includes a business or farmland, take professional advice.
How to reduce Inheritance Tax legally
The main methods, all within the rules:
- Use both bands. For married couples and civil partners, make sure unused bands transfer to the surviving partner — this alone can shield up to £1,000,000.
- Leave assets to your spouse. Transfers between spouses and civil partners are exempt, and the survivor inherits the unused bands.
- Use the annual exemptions. £3,000 a year, plus small gifts — it adds up over a decade.
- Make larger gifts early — PETs fall out of the estate after 7 years.
- Leave at least 10% to charity. This cuts the rate on the rest from 40% to 36%.
- Keep a valid will. Without one, the estate is distributed under the intestacy rules, which may not use the bands well and may leave assets to people you would not have chosen.
- Review regularly. Thresholds are frozen, property values rise, and circumstances change — an estate safely below the threshold five years ago may not be now.
What to check now
- Add up your estate and compare it with the £325,000 nil-rate band.
- Check a home passes to direct descendants, so the £175,000 band applies.
- If married or in a civil partnership, check both partners’ bands will transfer.
- Have you used this year’s £3,000 annual exemption?
- Note the dates of any large gifts in the last 7 years — they may still count.
- Check your will is up to date.
- If your estate includes a business or farmland, check the current GOV.UK position on the reformed reliefs.
Frequently asked questions
How much Inheritance Tax do I pay on £500,000?
For a single person with a home left to children, the £500,000 in bands covers it, so no tax is due. Without the residence band, the taxable amount is £175,000 and the tax is £70,000 at 40%.
What is the Inheritance Tax threshold in the UK?
£325,000 per person, plus up to £175,000 residence band: a single person can shield up to £500,000, a married couple up to £1,000,000.
Do I pay Inheritance Tax on gifts?
Gifts within the exemptions — £3,000 a year, small gifts, wedding gifts, gifts to a spouse or charity — are always tax-free. Larger gifts are tax-free if you survive 7 years; otherwise taper relief may reduce the tax.
Who pays Inheritance Tax?
Executors pay it from the estate, normally by the end of the sixth month after the month of death.
Can Inheritance Tax be avoided?
Not by hiding assets — that is unlawful. But it can be reduced legally: use both bands, gift early, leave assets to a spouse, and leave 10% to charity to cut the rate to 36%.
This article gives general information about UK tax, not personal financial or tax advice. Tax rules can change, and your situation may be different. Check GOV.UK or speak to a qualified accountant before you act.
