Inheritance Tax (IHT) is charged on the value of a person’s estate when they die. With property values having risen substantially over recent decades, more estates are being drawn into the IHT net than ever before. Understanding the nil-rate band, the residence nil-rate band, and how transferable allowances work between spouses can help families keep more of their wealth for future generations — or plan to mitigate the tax efficiently.
What Is Inheritance Tax?
IHT is charged at 40% on the value of an estate above the available threshold. The “estate” includes all assets — property, cash, investments, possessions, and certain gifts made in the seven years before death — minus any liabilities (mortgages, debts).
A reduced rate of 36% applies if at least 10% of the net estate is left to charity.
The Nil-Rate Band (NRB): £325,000
The Nil-Rate Band is the amount of an estate that can pass free of IHT. For 2025-26, this is £325,000 per person. The NRB has been frozen at this level since 2009 and will remain frozen until at least April 2030 under current plans — meaning fiscal drag is gradually pulling more estates into the IHT net.
Any estate worth more than £325,000 is taxed at 40% on the excess.
Basic example:
Estate value: £500,000 IHT threshold: £325,000 Taxable estate: £175,000 IHT at 40%: £70,000
The Residence Nil-Rate Band (RNRB): £175,000
In addition to the NRB, a Residence Nil-Rate Band of up to £175,000 is available where a person leaves their main home (or the proceeds from a former home) to direct descendants — children, stepchildren, grandchildren, or their spouses.
The RNRB is limited to the value of the residential property being passed on. If the property is worth less than £175,000, the RNRB is capped at the property’s value.
Combined allowances for a single individual:
NRB: £325,000 + RNRB: £175,000 = £500,000
An individual can pass up to £500,000 to their children completely free of IHT, provided their home is included.
Transferable Allowances Between Spouses and Civil Partners
Gifts between married couples and civil partners are completely exempt from IHT (the “spouse exemption”), provided both are UK-domiciled. When the first spouse dies, any unused NRB and RNRB can be transferred to the surviving spouse.
This means a surviving spouse can potentially have double the allowances:
| Allowance | Per Person | Combined (Both Transferred) |
|---|---|---|
| NRB | £325,000 | £650,000 |
| RNRB | £175,000 | £350,000 |
| Total | £500,000 | £1,000,000 |
A couple can pass up to £1,000,000 to their descendants free of IHT, provided both the full NRB and RNRB are available.
Transferability rules:
- The transfer is not automatic — the executor of the surviving spouse’s estate must claim the transferred allowance.
- The transferred NRB is the percentage of the deceased’s NRB that was unused (not a fixed £325,000 sum). For example, if the first spouse’s estate used 50% of their NRB, only 50% — not the full £325,000 — transfers to the survivor.
- The RNRB can be transferred even if the first spouse died before the RNRB was introduced (April 2017), as long as they did not use their RNRB.
The RNRB Taper for Larger Estates
The Residence Nil-Rate Band is tapered for estates worth more than £2 million. For every £2 by which the estate exceeds £2 million, the RNRB reduces by £1. The RNRB is fully withdrawn when the estate reaches £2,350,000 (£175,000 × 2 + £2,000,000).
| Estate Value | RNRB Available |
|---|---|
| Up to £2,000,000 | Full £175,000 |
| £2,100,000 | £125,000 |
| £2,200,000 | £75,000 |
| £2,350,000+ | £0 |
For couples, the taper applies to each person’s estate individually at the time of death — it is assessed on the surviving spouse’s estate (which may include inherited assets from the first death).
The Seven-Year Rule and Potentially Exempt Transfers
Gifts made to individuals during your lifetime are Potentially Exempt Transfers (PETs). If you survive for at least seven years after making the gift, it falls completely outside your estate and no IHT is due. If you die within seven years, the gift may be brought back into the estate (subject to tapering relief).
Taper relief on gifts:
| Years Between Gift and Death | IHT Rate on Gift |
|---|---|
| Less than 3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| Over 7 years | 0% |
Taper relief reduces the rate of tax on the gift itself, not the NRB. The NRB is used up first by the gifts, which can mean more of the estate is taxed at 40%.
Annual Exemptions and Small Gift Allowances
Beyond the NRB and RNRB, several annual exemptions allow tax-free gifting during your lifetime:
- Annual exemption: £3,000 per year (can carry forward one year’s unused allowance to give £6,000).
- Small gifts: Up to £250 to any number of individuals (cannot combine with the annual exemption for the same person).
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
- Normal expenditure from income: Regular gifts from surplus income (not capital) are exempt if they do not affect your standard of living.
- Spouse/civil partner exemption: Unlimited gifts between spouses (both UK-domiciled).
- Charity exemption: All gifts to UK registered charities are IHT-exempt.
Worked Example: Estate Planning for a Couple
Mr and Mrs Smith own a house worth £600,000, plus £300,000 in savings and investments. Total estate: £900,000.
On first death (say, Mr Smith): The entire estate passes to Mrs Smith under the spouse exemption — no IHT.
On second death (Mrs Smith’s estate: £900,000):
Available NRB: £325,000 (Mrs Smith) + £325,000 (transferred from Mr Smith) = £650,000 Available RNRB: £175,000 (Mrs Smith) + £175,000 (transferred from Mr Smith) = £350,000 (limited to property value of £600,000, but each allowance is capped at £175,000 each = £350,000 combined)
Total threshold: £650,000 + £350,000 = £1,000,000
Estate (£900,000) < threshold (£1,000,000): No IHT due.
If the estate were £1,200,000, taxable estate = £1,200,000 − £1,000,000 = £200,000. IHT = £200,000 × 40% = £80,000.
Key Takeaways
- IHT is charged at 40% on the estate above the available threshold.
- The NRB is £325,000 per person; the RNRB is £175,000 for homes passed to descendants.
- Married couples can combine allowances: up to £1,000,000 can pass to children IHT-free.
- The RNRB tapers by £1 per £2 of estate value above £2 million and is fully withdrawn at £2.35 million.
- Gifts made more than seven years before death are exempt from IHT.
Use the inheritance tax calculator to estimate the IHT due on any estate and explore the effect of allowances and lifetime gifts.